DRS/A 1 filename1.htm Amendment No.1 to Draft Registration Statement
Table of Contents

As confidentially submitted to the Securities and Exchange Commission on July 13, 2017.

Registration Statement No. 333-                

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

iClick Interactive Asia Group Limited

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Cayman Islands   7372   Not Applicable

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

15/F

Prosperity Millennia Plaza

663 King’s Road, Quarry Bay

Hong Kong S.A.R., People’s Republic of China

Tel: +852 3700 9000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

[Law Debenture Corporate Services, Inc.

4th Floor, 400 Madison Avenue

New York, New York 10017

(212) 750-6474]

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Shuang Zhao, Esq.

Cleary Gottlieb Steen & Hamilton LLP

c/o 37th Floor, Hysan Place

500 Hennessy Road, Causeway Bay, Hong Kong

(852) 2521 4122

 

James C. Lin, Esq.

Davis Polk & Wardwell LLP
c/o 18/F, The Hong Kong Club Building
3A Chater Road, Central, Hong Kong

(852) 2533 3368

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. Emerging growth company   

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.   ☒

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to Be Registered

 

Proposed
Maximum
Aggregate

Offering Price(2)(3)

 

Amount of

Registration Fee

Ordinary shares, par value US$0.001 per share(1)

  US$               US$            

 

 

(1) American depositary shares issuable upon deposit of the ordinary shares registered hereby have been registered under a separate registration statement on Form F-6 (Registration No.333-                ). Each American depositary share represents                  ordinary shares.
(2) Includes (i) ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option and (ii) ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public. These ordinary shares are not being registered for the purposes of sales outside of the United States.
(3) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED                    , 2017

PRELIMINARY PROSPECTUS

            American Depositary Shares

 

LOGO

iClick Interactive Asia Group Limited

Representing              Ordinary Shares

 

 

This is the initial public offering of our American Depositary Shares, or ADSs. We are selling                  ADSs. Each ADS represents                  of our ordinary shares, par value US$0.001 per share. We currently expect the initial public offering price to be between US$                 and US$                 per ADS.

We have granted the underwriters an option to purchase up to                  additional ADSs to cover over-allotments.

Prior to this offering, there has been no public market for our ADSs or our ordinary shares. We will apply to have the ADSs listed on the [NASDAQ Global Market/New York Stock Exchange] under the symbol “ICLK”

We are an “emerging growth company” under applicable U.S. Federal securities laws and are eligible for reduced public company reporting requirements.

Investing in the ADSs involves risks. See “Risk Factors” beginning on page 16.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Public
Offering
Price
     Underwriting
Discounts and
Commissions
     Proceeds
before
expenses
 

Per ADS

   US$                   US$                   US$               

Total

   US$      US$      US$  

The underwriters expect to deliver the ADSs to purchasers on or about                 , 2017.

 

 

 

Credit Suisse     Jefferies

 

 

                    , 2017


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TABLE OF CONTENTS

 

     Page  

Business

     111  

Regulation

     130  

Management

     139  

Principal Shareholders

     147  

Related Party Transactions

     150  

Description of Share Capital

     151  

Description of American Depositary Shares

     162  

Shares Eligible for Future Sale

     175  

Taxation

     177  

Underwriting

     183  

Expenses Relating to This Offering

     193  

Legal Matters

     194  

Experts

     195  

Where You Can Find Additional Information

     196  

Index to Consolidated Financial Statements

     F-1  
 

 

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the ADSs offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.

Until                    , 2017 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs. This prospectus contains information from a report dated June, 2017 entitled “China Online Marketing Market Independent Market Research” commissioned by us and prepared by Frost & Sullivan, an independent market research firm, to provide information on the online marketing market in China.

The Company

Our Business

We were the largest independent online marketing technology platform in China in terms of gross billing in 2016 according to Frost & Sullivan. We had the largest Chinese consumer data set in terms of number of active profiled users in 2016 among independent online marketing technology companies in China; during 2016, we bridged the largest number of multinational companies to the China market among all independent online marketing technology platforms in China according to Frost & Sullivan.

We serve as an integrated cross-channel gateway that provides marketers with innovative and cost-effective ways to optimize their online marketing efforts throughout their marketing cycle and achieve their branding and performance-based marketing goals. Our integrated data-driven solutions help marketers identify, engage and activate potential customers, monitor and measure the results of marketing campaigns, and create content catering to potential customers across different content distribution channels through both PC and mobile devices.

Our solutions are enabled and supported by our extensive data set, sophisticated data analytics capabilities and cutting-edge technologies. We collect data from a wide variety of channels, including through our proprietary tracking tools, from our marketers, publishers and ad exchanges when managing marketing campaigns, and to a lesser extent, from third-party strategic partners. From our large volume of unstructured data, we construct context-rich user profiles, utilizing our proprietary audience profiling and segmentation technologies. These user profiles, which are updated and refined on a continous basis, typically include information on a user’s attributes, such as his or her demographics, geographic location, device preference, spending history, personal interest and other online or offline behavioral pattern. In the 30 days leading up to April 15, 2017, we analyzed approximately 651.6 million active profiled users with 23 attributes on average for each such profile. Leveraging our sophisticated automation and deep learning technologies, we continually refine our big data analytics and update our user profiles to address the evolving needs of our customers, optimize the effectiveness of our solutions, and increase our operational efficiency while ensuring the stability of our data and platform as we scale up operations.

Our platform appeals to marketers by offering omni-channel reach to the Chinese audience. We provide our customers one-stop access to a wide variety of cross-channel content distribution opportunities, including those from leading online publishers in China. We offer both mobile audience solutions and other solutions based on channels desired by our customers. Our mobile audience solutions are non-search engine marketing solutions designed to identify, engage and activate audience exclusively on mobile apps, and monitor and measure the results of online marketing activities on such channels. Our other solutions are primarily focused on identifying, engaging and activating audience on non-mobile app content distribution channels, such as PC banner displays, PC video advertisements and search engine marketing. In the 30 days leading up to April 15, 2017, we covered approximately 72,000 mobile apps and 2.3 million websites. We work closely with our content distribution partners to facilitate innovative and effective audience engagement. In 2016, our gross billing from mobile audience solutions and other solutions amounted to US$112.4 million and US$123.8 million, respectively.

 



 

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We take a flexible approach to the delivery model of our solutions in order to cater to the preferences, levels of internal resources and sophistication of customers. Customers may choose to access our solutions through (i) a self-service model, under which they have the flexibility to utilize our solutions “a la carte” to complement their existing marketing resources, and (ii) a managed service model, where our account management team provides in-depth services that suit customers’ specified marketing objectives and budgets utilizing our solutions.

The success of our solutions is evidenced by our strong, diverse and loyal customer base from a broad range of industry verticals, including banking and finance, entertainment and media, and E-commerce. Our customers include direct marketer customers and marketing agencies, and feature companies of different sizes, including more than 150 multinationals companies in 2016, as well as small and medium-sized enterprises, and from different geographic regions in and outside China. We derived over 70% of our gross billing from direct marketer customers in 2015 and 2016.

We generate revenues primarily from customers’ marketing spend through our platform as they utilize our solutions, and to a lesser extent from rebates from certain publishers. We have achieved rapid growth in recent years. Our gross billing grew by 32.5% from US$178.2 million in 2015 to US$236.3 million in 2016 and our net revenues grew by 46.2% from US$65.2 million in 2015 to US$95.4 million in 2016. Our net loss was US$39.7 million and US$27.3 million in 2015 and 2016, respectively.

Our Industry

With an estimated growth of per capita disposable income of urban households at a compound annual growth rate, or CAGR, of 7.6% between 2016 and 2021, China represents one of the most important geographies for many marketers, and online marketing has become one of the most attractive options to those marketers in light of the increasing mobile and internet penetration in China, according to Frost & Sullivan. Total online marketing spend in China grew from RMB152.6 billion in 2012 to RMB343.4 billion in 2016, representing a CAGR, of 22.5%, and is expected to reach RMB767.1 billion in 2021, representing a CAGR of 17.4% from 2016 to 2021. In 2016, online marketing spend accounted for approximately 37.2% of total marketing spend in China, surging from 21.9% in 2012. This percentage is expected to continue to increase in the coming years, reaching approximately 52.3% in 2020, when online marketing surpasses offline marketing as the primary segment in China’s marketing industry.

Technologies enable marketers to optimize marketing resources and to create and deliver tailored marketing content to a wide range of audience effectively and efficiently, and provide instrumental data insights and feedbacks on audience engagement. The total size of China’s online marketing technology market, as measured by gross billing, was RMB129.1 billion in 2016, growing from RMB53.7 billion 2012, representing a CAGR of 24.5%, and is expected to further increase to RMB302.3 billion in 2021, representing a CAGR of 18.5% from 2016 to 2021. China’s online marketing technology market is expected to grow faster than the market in the United States. Compared to more mature online marketing technology markets, marketers in China typically have smaller marketing departments, thereby creating opportunities for independent online marketing technology companies like us to provide value added service.

Independent online marketing technology companies, which are online marketing technology companies that do not own, or are not part of any group which owns, any online publishing resources, generally have access to more diverse sources of data and wider range of content distribution opportunities and are perceived to have the ability to provide more neutral and unbiased value proposition to marketers. The total size of China’s independent online marketing technology market, as measured by gross billing, was RMB29.6 billion in 2016, growing from RMB8.4 billion in 2012, representing a CAGR of 37.2%, and is expected to reach RMB114.6 billion in 2021, representing a CAGR of 31.1% from 2016 to 2021.

 



 

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Our Competitive Strengths

We believe that the following competitive strengths have contributed to our success, differentiated us from our competitors and will continue to support our growth:

 

    Leading independent online marketing technology platform in China with a highly scalable and flexible business model. We were the largest independent online marketing technology platform in China in terms of gross billing in 2016, according to Frost & Sullivan. As one of the first independent online marketing technology platforms in China to apply a data-driven approach to address marketers’ needs, our business has grown rapidly. In 2016, our gross billing reached US$236.3 million, up by 32.5% from 2015, leading to net revenue of US$95.4 million, up by 46.2% from 2015.

 

    Largest independent Chinese consumer data set with omni-channel, targeted audience reach. We had the largest Chinese consumer data set in terms of number of active profiled users in 2016 among independent online marketing technology companies in China, according to Frost & Sullivan. In the 30 days leading up to April 15, 2017, we analyzed data of approximately 651.6 million active profiled users. The average daily volume of the data we collected reached 1.2 terabytes in the 30 days leading up to April 15, 2017.

 

    Highly sophisticated and automated platform powered by proprietary, cutting-edge technologies. Our automated online marketing platform is powered by cutting-edge and proprietary technologies. Our refined big data analytics enable us to offer more effective marketing solutions, and increase our operational efficiency while ensuring the stability of our data and platform. Our marketing platform is built on highly scalable and reliable cloud-based infrastructure. This allows us to harness large quantities of real-time data and ensures high speed performance at a larger scale to accommodate more customers and increased complexity of their online marketing campaigns.

 

    Strong, diverse and loyal customer base. We have a strong and diverse customer base from a broad range of industry verticals, including banking and finance, entertainment and media, and E-commerce. Our customers include over 150 multinational companies in 2016, making us the No.1 independent online marketing technology platform bridging the largest number of multinational companies to the Chinese market, according to Frost & Sullivan. Our diverse customer base also includes small and medium-sized enterprises. We provide tailored and user-friendly solutions to cater to customers and marketers of different levels of sophistication and from different industry verticals.

 

    Deep knowledge and familiarity with China’s online marketing industry. We provide marketers with one-stop access to a wide variety of cross-channel audience engagement opportunities in China. We are one of the first independent online marketing technology platforms in China to apply a data-driven approach to address marketers’ needs in China, and we have fostered in-depth knowledge of, and cooperation with leading online channels covering approximately 72,000 mobile apps and 2.3 million websites in the 30 days leading up to April 15, 2017, to help marketers, especially multinational marketers, navigate through the fragmented landscapes to identify and reach their potential customers.

 

    Visionary leadership with proven track record of organic growth and acquisition execution. Our success is attributable to the deep industry experience and proven execution track record of our senior management team, with global perspectives and insightful knowledge in both technology and the online marketing industry. Our management team’s experience in multinational companies and roots in China enables us to expand our network and reach in the fragmented and complex Chinese online marketing market as well as develop in-depth understanding of the needs of multinational companies.

 



 

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Our Strategies

We intend to enhance our competitive strengths and pursue the following strategies to expand our business:

 

    Optimize and diversify our customer base. We plan to continue to optimize and diversify our customer base, including attracting customers to our self-service model, and customers from additional industry verticals and geographic markets, through developing and offering more tailored and user-friendly solutions and services, and enhancing our sales and marketing efforts.

 

    Increase customer marketing spend on our platform. We intend to offer new features and enhanced functionalities on our platform to provide more effective and comprehensive solutions, especially mobile audience solutions. In addition, we are working on new partnership initiatives, which would make third-party applications available to our customers through our platform directly, further enhancing customer experience and hence increasing the stickiness of our platform. We also intend to explore innovative audience engagement formats across multiple channels, in particular on mobile apps.

 

    Continue to enlarge audience data set, strengthen data analytics capabilities and innovate technologies. We will continue to collaborate with our customers, publishers and other third-party partners to increase the dimensions and varieties of our data assets. We also plan to continue investing in data science technologies, including refreshing and upgrading data modeling and segmentation technologies to meet customer demands in different market segments and industry verticals. In addition, we plan to upgrade our technical infrastructure to support our growing data set and data analytics capabilities as we continue to expand.

 

    Extend data application across more aspects in online marketing and beyond. We intend to broaden our solution offerings across more aspects in online marketing, including content creation and customer relationship management. We also plan to explore the application of our data in areas beyond online marketing. For example, we are in preliminary discussions with insurance companies to collaborate on the development of data models to be used in credit scoring algorithms and risk pricing rules.

 

    Explore strategic alliance and acquisition opportunities. We plan to continue to explore investment, acquisition and business collaboration opportunities and will consider opportunities that complement or enhance our existing operations and are strategically beneficial to our long-term goals.

Our Challenges

Our ability to execute our strategies is subject to risks and uncertainties, including those relating to our ability to:

 

    retain existing customers;

 

    attract new customers and further diversify our customer base, including more customers to use our solutions on a self-serve basis and marketers from new industries and geographic regions;

 

    maintain the breadth and depth of our cooperation with content distribution channels, including publishers, ad exchanges, and ad networks, and attract new ones in order to increase the volume and breadth of content distribution opportunities available to us;

 

    adapt our solutions and service offerings to meet evolving business needs, including to address market trends such as the migration of consumers from PCs to mobile devices;

 

    maintain the proper functioning of our technology architecture as we scale up;

 

    maintain and grow our data assets in order to help marketers identify, engage and convert their audience;

 



 

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    maintain a high level of customer satisfaction;

 

    adapt to a changing regulatory landscape governing privacy matters;

 

    acquire businesses, products and technologies and to integrate these acquisitions;

 

    increase awareness of our brand among marketers on a global basis in a cost-effective manner; and

 

    attract and retain employees.

In addition, we face risks and uncertainties related to our corporate structure and regulatory environment in China, including:

 

    We will continue to rely on the contractual arrangements that establish the structure for certain of our operations in China;

 

    We rely on contractual arrangements with our variable interest entity and its shareholders for certain of our business operations, which may not be as effective as direct ownership in providing operational control;

 

    Any failure by our variable interest entity or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business;

 

    Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us; and

 

    Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.

Please see “Risk Factors” and other information included in this prospectus for a detailed discussion of these challenges and other risks and uncertainties that we face.

Corporate History and Corporate Structure

We commenced our online marketing business in 2009. In February 2010, we restructured our holding structure by incorporating Optimix Media Asia Limited in the Cayman Islands as the holding company of Optimix Media Asia Limited, or Optimix HK, to facilitate financing and offshore listing. In March 2017, we changed our name from Optimix Media Asia Limited to iClick Interactive Asia Group Limited.

In July 2015, we substantially expanded our online marketing business into mobile channels by acquiring all shares in OptAim Ltd., or OptAim, which operates in China through OptAim (Beijing) Information Technology Co., Ltd., or OptAim Beijing, its wholly owned subsidiary. OptAim Beijing has entered into a set of contractual arrangements with Beijing OptAim Network Technology Co., Ltd., or OptAim Network, OptAim Network’s nominee shareholders and Zhiyunzhong (Shanghai) Technology Co., Ltd., or Zhiyunzhong, the wholly owned Chinese subsidiary of OptAim Network.

 



 

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The following diagram illustrates our organizational structure, including our subsidiaries, our variable interest entity, or VIE, and the VIE’s subsidiary as of the date of this prospectus.

 

LOGO

 

(1) The nominee shareholders of OptAim Network are Jie Jiao and Jian Tang, who hold 51% and 49% equity interests in OptAim Network, respectively. Jie Jiao is our chief financial officer, and Jian Tang is our co-founder, director, chief operating officer and chief technology officer.

 



 

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Foreign ownership in advertising companies used to be subject to certain restrictions under the PRC laws and regulations. To comply with the then-effective PRC laws and regulations, OptAim Beijing entered into a set of contractual arrangements with OptAim Network and its shareholders. The contractual arrangements between OptAim Beijing, OptAim Network and the shareholders of OptAim Network allow us to:

 

    exercise effective control over OptAim Network and Zhiyunzhong;

 

    receive substantially all of the economic benefits of OptAim Network and Zhiyunzhong; and

 

    have an exclusive option to purchase all or part of the equity interests and assets in OptAim Network.

As a result of these contractual arrangements, we have effective control over, and are the primary beneficiary of, OptAim Network and therefore treat OptAim Network and its subsidiary as our consolidated affiliated entities under U.S. GAAP and have consolidated their financial results in our consolidated financial statements in accordance with U.S. GAAP. For a description of these contractual arrangements, see “Our History and Corporate Structure.”

The laws and regulations that imposed restrictions on foreign ownership in advertising companies, including the Administrative Provisions on Foreign-Invested Advertising Enterprises were abolished in June 2015. We are in the process of transferring the business operated by our VIE, OptAim Network, to our wholly owned subsidiaries. We expect that by the end of 2018, OptAim Beijing will replace OptAim Network as contracting party for all our mobile audience solution business that are operated by OptAim.

There are uncertainties under the PRC laws whether our collection and use multiple kinds of data from multiple sources in China to improve the cost-effectiveness of marketing campaigns for customers and marketers in and outside China may be deemed as “foreign-related survey”, which requires a foreign-related survey license from the National Bureau of Statistics in China or its local counterparts. This license may only be granted to a domestic enterprise or a sino-foreign enterprise which meets the several requirements under the relevant PRC laws. In light of these uncertainties and out of prudence, we, through our VIE, OptAim Network, applied for and was granted a foreign-related survey license on June 6, 2017. Therefore, we will continue to rely on OptAim Bejing’s contractual arrangements with OptAim Network and its shareholders to conduct certain of our operations in China, to the extent these operations are deemed foreign-related survey.

Corporate Information

We were formed as a Cayman Islands exempted limited liability company on February 3, 2010 under the name “Optimix Media Asia Limited.” On March 13, 2017, Optimix Media Asia Limited changed its name to iClick Interactive Asia Group Limited. Our principal executive office is at: 15/F, Prosperity Millennia Plaza, 663 King’s Road, Quarry Bay, Hong Kong S.A.R. Our telephone number at this address is (852) 3700 9000. Our registered office in the Cayman Islands is located at: ATC Trustees (Cayman) Limited, Landmark Square, 3rd Floor, 64 Earth Close, Grand Cayman KY1-1203, Cayman Islands. Our agent for service of process in the United States, [Law Debenture Corporate Services, Inc.], is located at: [4th Floor, 400 Madison Avenue, New York, New York 10017].

Investor should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is: www.i-click.com. The information contained on our website is not part of this prospectus.

 



 

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Implications of Being an Emerging Growth Company

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. For as long as we remain an emerging growth company, we intend to take advantage of the exemptions discussed in this paragraph.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision, and as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We will remain an emerging growth company until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Conventions that Apply to this Prospectus

Unless otherwise indicated or the context otherwise requires, in this prospectus:

 

    “active profiled user” refers to a profiled user whom we are able to detect that he/she has online activities during a specific measurement period. A “profiled user” refers to a user whom we have collected sufficient information from his/her online activities to establish a descriptive understanding of the person;

 

    “ADSs” refers to our American depositary shares, each of which represents      ordinary shares;

 

    “China” or “PRC” refers to the People’s Republic of China, excluding, for the purposes of this prospectus only, Hong Kong, Macau and Taiwan;

 

    “direct marketer customers” refers to marketers that have direct contractual relationship with us;

 

    “end marketers” refers to marketers that are represented by our marketing agency customers and have no direct contractual relationship with us;

 

    “HK$” or “Hong Kong dollars” refers to the legal currency of Hong Kong;

 

    “independent online marketing technology platforms” refers to online marketing technology platforms which do not own any online publishing resources, and are not part of any group which owns any online publishing resources;

 

    mobile apps or websites “covered” refers to the mobile apps or websites from which we are able to receive data to build user profiles;

 

    “multinational companies” refer to companies that own or control production of goods or provision of services in one or more countries other than their home countries;

 



 

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    “online marketing technology platforms” refers to online marketing platforms which, through a combination of marketing strategies and technologies, assist marketers in optimizing their marketing resources;

 

    “our marketers” refers to both direct marketer customers, and end marketers;

 

    “our customers” refers to entities from which we derive revenue under our marketing campaign contracts;

 

    “RMB” or “Renminbi” refers to the legal currency of China;

 

    “we,” “us,” “our company” and “our” refer to iClick Interactive Asia Group Limited; and

 

    “$”, “US$,” “dollars” or “U.S. dollars” refers to the legal currency of the United States.

Discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

This prospectus contains statistical data that we obtained from various government and private publications. We have not independently verified the data in these reports. Statistical data in these publications also include projections based on a number of assumptions. If any one or more of the assumptions underlying the statistical data turns out to be incorrect, actual results may differ from the projections based on these assumptions.

Our reporting and functional currency is the U.S. dollar. The functional currency of our subsidiaries and VIE and VIE’s subsidiary in China is Renminbi. The functional currencies of our non-PRC subsidiaries are the respective currencies of the country in which they are domiciled, including Hong Kong dollar, Singapore dollars or New Taiwan dollars. This prospectus contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars in this prospectus were made at the rate of RMB6.9430 to U.S$1.00 and all translations of Hong Kong dollars into U.S. dollars in this prospectus were made at the rate of HK$7.7534 to US$1.00, each being the noon buying rates on December 30, 2016 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We make no representation that the Renminbi or Hong Kong dollars referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all. On July 7, 2017, the noon buying rate for Renminbi was RMB6.8039 to US$1.00, as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.

 



 

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The Offering

 

The Offering

We currently estimate that the initial public offering price will be between US$             and US$              per ADS.

 

ADSs offered by us

             ADSs

 

ADSs outstanding immediately after this offering

             ADSs (or              ADSs if the underwriters exercise their option to purchase additional ADSs in full)

 

Ordinary shares outstanding immediately after this offering

             ordinary shares (or              ordinary shares if the underwriters exercise their option to purchase additional ADSs representing ordinary shares in full)

 

Option to purchase additional ADSs

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an additional              ADSs from us.

 

The ADSs

Each ADS represents              ordinary shares, par value US$0.001 per share.

The depositary will be the holder of the ordinary shares underlying the ADSs and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.

 

  You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

 

  We may amend or terminate the deposit agreement for any reason without your consent. Any amendment that imposes or increases fees or certain charges or which materially prejudices any substantial existing right you have as an ADS holder will not become effective as to outstanding ADSs until 30 days after notice of the amendment is given to ADS holders. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.

To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” You should also read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.

 

[Reserved ADSs

At our request, the underwriters have reserved for sale, at the initial public offering price, up to an aggregate of              ADSs offered in this offering to some of our directors, officers, employees, business associates and related persons through a directed share program.]

 



 

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Use of proceeds

We expect that we will receive net proceeds of approximately US$             million from this offering, assuming an initial public offering price of US$             per ADS, which is the midpoint of the estimated range of the initial public offering price, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We plan to use the net proceeds from this offering primarily for the following purposes: US$             in research and development and big data deep learning capabilities and capacities; US$             in the development and expansion of our suite of solutions and service offerings; and US$             in sales and marketing activities to attract, in particular, more customers to use our solutions on a self-serve basis, and customers from additional industry verticals and geographic markets. We also plan to use the remaining portion of the net proceeds we receive from this offering for general corporate purposes and in investment, acquisition and business collaboration opportunities that complement or enhance our existing operations and are strategically beneficial to our long-term goals, although we have no present commitments or agreements to enter into any investment, acquisition or business collaboration.

 

  See “Use of Proceeds” for more information.

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in the ADSs.

 

Listing

We intend to apply to have the ADSs listed on the [NASDAQ Global Market/New York Stock Exchange, or NYSE] under the symbol “ICLK.” Our ADSs and shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

Lock-up

We, our directors and executive officers, and [all of our existing shareholders] have agreed with the underwriters, subject to certain exceptions, not to offer, sell, transfer or otherwise dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting.”

Depositary

 



 

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Summary Consolidated Financial and Other Data

The following summary consolidated financial data for the years ended December 31, 2015 and 2016, and as of December 31, 2015 and 2016, have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Summary Consolidated Financial and Other Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

On July 24, 2015, we acquired OptAim from all its shareholders in consideration of shares and cash payment. Pursuant to the terms of the agreement, we issued 2,535,091 ordinary shares to certain selling shareholders and paid cash consideration for the other shareholder. Since the date of the acquisition, OptAim has been our wholly owned subsidiary and has been consolidated into our results of operations. See note 4(b) of our consolidated financial statements included elsewhere in this prospectus.

The following table presents our summary consolidated statement of comprehensive income for the years ended December 31, 2015 and 2016.

 

     Year Ended December 31,  
     2015     2016  
     (US$ in thousands, except for
per share and share data)
 

Summary Consolidated Statements of Comprehensive Loss:

    

Net revenues

     65,242       95,357  

Cost of revenues

     (34,531     (61,048
  

 

 

   

 

 

 

Gross profit

     30,711       34,309  
  

 

 

   

 

 

 

Operating expenses:

    

Research and development expenses

     (8,106     (8,584

Sales and marketing expenses

     (31,385     (28,266

General and administrative expenses

     (12,745     (26,767
  

 

 

   

 

 

 

Total operating expenses

     (52,236     (63,617
  

 

 

   

 

 

 

Operating loss

     (21,525     (29,308

Interest expense

     (107     (713

Other gains/(losses), net

     791       (1,082

Fair value (loss)/gain on derivative liabilities

     (19,390     3,995  
  

 

 

   

 

 

 

Loss before income tax expense

     (40,231     (27,108

Income tax benefit/(expenses)

     555       (222

Share of losses from an equity investee

     (38     —    
  

 

 

   

 

 

 

Net loss

     (39,714     (27,330
  

 

 

   

 

 

 

Accretion to convertible redeemable preferred shares redemption value

     (2,692     (773

Accretion to redeemable ordinary shares redemption value

     (1,982     (1,556

Deemed contribution from Series B-1 preferred shareholders

     2,591       —    
  

 

 

   

 

 

 

Net loss attributable to iClick Interactive Asia Group Limited’s ordinary shareholders

     (41,797     (29,659
  

 

 

   

 

 

 

 



 

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     Year Ended December 31,  
     2015     2016  
     (US$ in thousands, except for
per share and share data)
 

Other comprehensive loss:

    

Foreign currency translation adjustment, net of US$nil tax

     (129     (139
  

 

 

   

 

 

 

Comprehensive loss attributable to iClick Interactive Asia Group Limited

     (39,843     (27,469
  

 

 

   

 

 

 

Net loss per share attributable to iClick Interactive Asia Group Limited

    

Basic

     (3.58)       (2.26)  

Diluted

     (3.58)       (2.26)  

Weighted average number of ordinary shares used in per share calculation

    

Basic

     11,661,049       13,151,063  

Diluted

     11,661,049       13,151,063  
  

 

 

   

 

 

 

The following table presents our summary consolidated balance sheet data as of December 31, 2015 and 2016.

 

     Year Ended December 31,  
     2015     2016  
     (US$ in thousands)  

Summary Consolidated Balance Sheet Data:

    

Current assets:

    

Cash and cash equivalents

     10,395       27,280  

Accounts receivable, net of allowance for doubtful receivables of US$1,733 and US$1,693 as of December 31, 2015 and 2016, respectively

     28,423       30,694  

Rebates receivable

     3,642       2,250  

Prepaid media cost

     24,793       34,409  

Non-current assets:

    

Intangible assets, net

     19,095       14,804  

Goodwill

     48,496       48,496  

Total assets

     146,110       169,640  
  

 

 

   

 

 

 

Liabilities, mezzanine equity and shareholders’ deficit:

    

Current liabilities

     115,124       126,572  

Non-current liabilities

     3,705       2,997  
  

 

 

   

 

 

 

Total liabilities

     118,829       129,569  
  

 

 

   

 

 

 

Total mezzanine equity

     83,210       104,383  

Total shareholders’ deficit

     (55,929     (64,312
  

 

 

   

 

 

 

Total liabilities, mezzanine equity and shareholders’ deficit

     146,110       169,640  
  

 

 

   

 

 

 

 



 

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Key Operating and Financial Metrics

We regularly review a number of metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions. The main metrics we consider are set forth in the table below.

 

     Year Ended December 31,  
     2015     2016  
     (US$ in
thousands)
    (% of gross
billing)
    (US$ in
thousands)
    (% of gross
billing)
 

Operating Metrics:

        

Gross billing

     178,239       100       236,253       100  

Gross billing from mobile audience solutions

     41,323       23.2       112,403       47.6  

Gross billing from other solutions

     136,916       76.8       123,850       52.4  

Financial Metrics:

        

Net revenues

     65,242       36.6       95,357       40.4  

Net revenues from mobile audience solutions

     11,908       6.7       57,761       24.5  

Net revenues from other solutions

     53,334       29.9       37,596       15.9  

Adjusted EBITDA

     (8,850     (5.0     (2,240     (0.9

Adjusted net loss

     (11,583     (6.5     (8,999     (3.8

Gross Billing

Gross billing is an important operating measure by which we evaluate and manage our business. We define gross billing as the aggregate dollar amount that our customers pay us, after deducting rebates paid and discounts given to customers.

We use gross billing to assess our business growth, market share and scale of operations, and our ability to generate gross billing is strongly correlated to our ability to generate net revenues. As we have defined gross billing for internal uses, it may not be comparable to similarly titled measures used by other companies in the industry which present the impact of media costs differently.

Non-GAAP Financial Measures

We use adjusted EBITDA and adjusted net loss, each a non-GAAP financial measure, in evaluating our operating results and for financial and operational decision making purposes.

We believe that adjusted EBITDA and adjusted net loss help identify underlying trends in our business that could otherwise be distorted by the effect of the expenses and gains that we include in net loss. We believe that adjusted EBITDA and adjusted net loss provide useful information about our operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

Adjusted EBITDA and adjusted net loss should not be considered in isolation or construed as an alternative to net loss or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to review the historical non-GAAP financial measures to the most directly comparable GAAP measures. Adjusted EBITDA and adjusted net loss presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

 



 

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Adjusted EBITDA represents net loss before (i) depreciation and amortization, (ii) interest expense, (iii) income tax (benefit)/expense, (iv) share-based compensation, (v) fair value loss/(gain) on derivative liabilities, (vi) share of loss from an equity investee, (vii) compensation in relation to the acquisition of OptAim, and (viii) other (gains)/losses, net. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures — Adjusted EBITDA” for information regarding the limitations of using adjusted EBITDA as a financial measure and for a reconciliation of our net loss to adjusted EBITDA.

The table below sets forth a reconciliation of our net loss to adjusted EBITDA for the periods indicated:

 

     Year Ended December 31,  
     2015     2016  
     (US$ in thousands)  

Net loss

     (39,714     (27,330

Add / (less):

    

Depreciation and amortization

     3,181       5,824  

Interest expense

     107       713  

Income tax (benefit)/expense

     (555     222  
  

 

 

   

 

 

 

EBITDA

     (36,981     (20,571

Add:

    

Share-based compensation

     6,494       21,244  

Fair value loss/(gain) on derivative liabilities

     19,390       (3,995

Share of loss from an equity investee

     38       —    

Compensation in relation to the acquisition of OptAim

     3,000       —    

Other (gains)/losses, net

     (791     1,082  
  

 

 

   

 

 

 

Adjusted EBITDA

     (8,850     (2,240
  

 

 

   

 

 

 

Adjusted net loss represents net loss before (i) share-based compensation, (ii) fair value loss/(gain) on derivative liabilities, (iii) share of loss from an equity investee, (iv) compensation in relation to the acquisition of OptAim, and (v) other (gains)/losses, net. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures — Adjusted Net Loss” for information regarding the limitations of using adjusted net loss as a financial measure and for a reconciliation of our net loss to adjusted net loss.

The table below sets forth a reconciliation of our net loss to adjusted net loss for the periods indicated:

 

     Year Ended December 31,  
     2015     2016  
     (US$ in thousands)  

Net loss

     (39,714     (27,330

Add:

    

Share-based compensation

     6,494       21,244  

Fair value loss/(gain) on derivative liabilities

     19,390       (3,995

Share of loss from an equity investee

     38       —    

Compensation in relation to the acquisition of OptAim

     3,000       —    

Other (gains)/losses, net

     (791     1,082  
  

 

 

   

 

 

 

Adjusted net loss

     (11,583     (8,999
  

 

 

   

 

 

 

 



 

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RISK FACTORS

Risks Related to Our Business and Industry

We have experienced rapid growth in recent periods, and such growth rates may not be indicative of our future growth.

Our gross billing and net revenues have increased substantially since our inception, especially since our acquisition of OptAim in July 2015, which significantly contributed to our recent growth. We may not be able to sustain growth consistent with our recent history, or at all. You should not consider our gross billing and net revenues growth in recent periods as indicative of our future performance. In future periods, our gross billing and net revenues could decline or grow more slowly than we expect. We believe our growth depends on a number of factors, some of which are described in more details in this section, including our ability to:

 

    retain existing customers;

 

    attract new customer and further diversify our customer base, including more customers to use our solutions on a self-serve basis and marketers from new industries and geographic regions;

 

    maintain the breadth and depth of our cooperation with content distribution channels, including publishers, ad exchanges, and ad networks, and attract new ones in order to increase the volume and breadth of content distribution opportunities available to us;

 

    adapt our solutions and service offerings to meet evolving business needs, including to address market trends such as the migration of consumers from PCs to mobile devices;

 

    maintain the proper functioning of our technology architecture as our business continues to grow;

 

    maintain and grow our data assets in order to help marketers identify, engage and convert their audience;

 

    maintain a high level of customer satisfaction;

 

    adapt to a changing regulatory landscape governing privacy matters;

 

    acquire businesses, products and technologies and to integrate these acquisitions;

 

    increase awareness of our brand among marketers on a global basis in a cost-effective manner; and

 

    attract and retain employees.

We cannot assure you that we will be able to successfully accomplish any of these objectives.

We may not be successful in implementing our mobile strategies, which could materially and adversely affect our results of operations.

Our recent growth was in part driven by our expansion since 2014 into mobile channels to identify, engage and convert mobile audience. Our limited operating history in mobile channels may make it difficult to evaluate our current business and future prospects, which will be adversely affected if we fail to successfully maintain and enhance our mobile capabilities. To deliver, maintain and enhance our mobile capabilities, it is important that we further integrate with a wider range of mobile technologies, systems, networks and standards that we do not control. We may not be successful in developing solutions that operate effectively with these technologies, systems, networks or standards. Any of these could have a material adverse effect on our business, prospects and results of operations.

While marketing via non-mobile online channels has been established for several years, marketing via mobile channels, in particular via mobile apps, is a relatively new phenomenon. We have experienced and expect

 

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to continue to face more significant competition for our mobile audience solutions. In addition, in light of the rising demand for marketing via mobile apps, mobile app publishers, especially popular mobile app publishers tend to command stronger bargaining power compared to their non-mobile app publisher counterparts. All of these have resulted in a downward pricing pressure on, and increased media costs for, our mobile audience solutions. While net revenues from our mobile audience solutions increased significantly by 385.1% from US$11.9 million in 2015 to US$57.8 million in 2016, which contributed to the increase in our overall gross billing, gross margins for our mobile audience solutions remained relatively low in 2015 and 2016, compared to those of our other solutions during the same period, which contributed to the decrease in our overall gross profit margin from 47.1% in 2015 to 36.0% in 2016. As we continue to prioritize the execution of our mobile strategy and face increasing competition and pricing pressure for our mobile audience solutions, our profit margin could be materially and adversely affected.

We have incurred net losses in the past and may not achieve profitability in the future.

We generated net losses of US$39.7 million in 2015 and US$27.3 million in 2016. As of December 31, 2016, we had an accumulated deficit of US$124.4 million. We will need to generate increased revenue levels in future periods to become profitable, and, even if we do, we may not be able to improve our profitability as we intend to continue to expend significant funds to grow our marketing and sales operations, develop and enhance our data analytic capabilities, scale our data center infrastructure and services capabilities and expand into new market segments. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenue enough to offset our operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described in this prospectus, and unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve or sustain profitability, the market price of our ADSs may significantly decrease.

Our net revenues, net revenues as a percentage of gross billing, gross margin and the comparability of our financial results may be affected by the relative percentage of gross billing recognized as net revenues under the gross and net models.

We derive revenue under two models. Our revenue for cost-plus advertisement campaigns and rebates earned from certain website publishers is reported under the net model. Our revenue from performing specified actions (i.e., a cost-per-mille, or CPM, cost-per-click, or CPC, cost-per-action, or CPA, cost-per-sale, or CPS, cost-per-lead, or CPL, and return-on-investment, or ROI, basis) is reported under the gross model. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Operating and Financial Metrics — Net Revenues” for more details. The gross profit margin under our net model is higher than the gross model as cost of revenues under the net model does not include media cost. Consequently, an increase in the percentage of gross billing recognized as net revenues under our gross model will have a positive impact on our net revenues and a negative impact on gross profit margin. As the relative percentage of gross billing from cost-plus advertisement campaigns, from rebates earned from certain website publishers and from performing specified actions changes from time to time, the relative percentage of gross billing recognized as net revenues under the two models also fluctuates, which would consequently impact our net revenues and gross margin. Our mobile audience solutions on one hand, and other solutions, on the other hand, each represents a mixture of revenue recognized on gross basis and on net basis and the proportion of each fluctuates from period to period. Therefore our net revenues, net revenues as a percentage of gross billing, gross margin and the comparability of our financial results in one period to another may be affected by the relative percentage of gross billing recognized as net revenues under the gross model and net model.

Failure to retain existing customers or attract new ones could adversely impact our business and results of operations.

We do not have long-term customer contracts, and a majority of our customer contracts are for a term of one year or shorter. Our customers, which refer to entities from which we recognize revenue under our marketing campaign contracts with them and which include direct marketer customers and marketing agencies, are not obligated to use our platform on an exclusive basis and they generally use multiple providers to manage their

 

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marketing spend. Accordingly, we must convince our customers to use our platform, increase their usage and spend a larger share of their online marketing budgets with us, and do so on an on-going basis.

Our ability to achieve customer contract renewals and new customer sales depends on many factors, some of which are out of our control, including:

 

    customer satisfaction with our solutions, including any new solutions that we may develop,

 

    our pricing competitiveness,

 

    customer satisfaction with our account managing services,

 

    our ability to tailor our solution offerings and delivery and pricing models in accordance with the evolving needs of our customers and end marketers,

 

    our ability to expand our data base and solutions to serve marketers in a wider range of industries and geographic regions,

 

    mergers, acquisitions or other consolidation among our customers and end marketers, and

 

    the effects of global economic conditions on spending levels of our customers and end marketers generally.

Therefore, we cannot assure you that customers that have generated marketing spend on our platform in the past will continue to spend at similar levels or that they will continue to use our platform at all. We may not be able to replace customers who decrease or cease their usage of our platform with new customers that spend similarly on our platform. We have relied on a limited number of customers to generate a significant portion of our revenues. For example, in 2016, we derived 18% of our net revenues from a marketer in the entertainment industry and 11% of our net revenues from a marketer in the e-commerce industry. If our existing customers do not continue to use or increase their use of our platform, or if we are unable to attract sufficient marketing spend on our platform from new customers, our business and results of operations could be materially and adversely affected.

Loss of any marketing agency customer may materially and adversely affect our business and results of operations.

We engage third-party marketing agencies to help source and serve some of our marketers. In 2016, we had over 2,000 customers, including over 1,800 direct marketer customers and over 500 marketing agency customers, which represented over 1,100 end marketers and a significant portion of our gross billing and net revenues. We do not have exclusive business arrangement with these marketing agencies. If we lose any marketing agency, we risk losing business from end marketers represented by that agency. In addition, some marketing agencies have their own business arrangements with content distribution channels and can directly connect marketers with such channels. Our business may suffer to the extent that marketing agencies and content distribution channels purchase and sell content distribution opportunities directly from one another or through intermediaries other than us. Loss of marketing agencies as our customers could materially and adversely affect our business and results of operations.

Furthermore, our contractual arrangements with marketing agency customers do not provide us with control or oversight over their day-to-day business activities. If any of our marketing agency customers engage in activities that violate laws and regulations, our reputation could be harmed and our business and results of operations could be materially and adversely affected.

Loss of any content distribution channel may materially and adversely affect our business and results of operations.

Our consistent access to attractive content distribution opportunities is crucial to our business. Our content distribution channels are concentrated and primarily include online and mobile publishers, major search engines

 

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and ad exchanges, including those owned or operated by Tencent, Baidu, Google and Alibaba. Media costs for content distribution opportunities on Tencent, Baidu, Google and Alibaba channels in aggregate accounted for 84.0% and 81.6% of our media costs in 2015 and 2016, respectively. The loss of access to content distribution opportunities from one of those companies would negatively impact our ability to help marketers reach their audience. We currently do not own or control any content distribution channels in China. Our contracts with content distribution channels generally do not impose long-term obligations requiring them to make their content distribution opportunities available to us, and under some of these contracts, content distribution channels may terminate the contracts during their terms if we do not meet the minimum market spending requirements in the contracts. Our ability to source content distribution opportunities from them depends in part on our ability to continuously generate sufficient market spending from our customers on these channels. We cannot assure you that we will successfully retain our content channel partners on terms favorable or acceptable to us.

We generally enter into annual framework agreements with content distribution channel partners. These agreements generally provide for certain rebates, generally calculated as a percentage of marketing spend, that we are entitled to should the market spending during the terms exceed the specified thresholds. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Operating and Financial Metrics — Net Revenue,” “— Critical Accounting Policies — Revenue recognition — Cost-Plus and Agreed Rebates to be Earned from Certain Website Publishers ” and “— Key Components of Results of Operations — Cost of Revenues; Gross Profit Margin” for a description of the accounting treatment of rebates that we receive from content distribution channels. If these or any other content distribution channel were to change their incentive programs or to cease doing business with us for any reason, our financial results would be materially adversely affected.

Furthermore, our platform is connected with some of our content distribution channels’ platforms through application programming interfaces, or API, such as the Baidu API and Google API. We are subject to standard API terms of use of such content distribution channels, which govern the use and distribution of data from them. Our business significantly depends on access to these APIs, particularly the Baidu API and Google API on commercially reasonable terms. Our business would be harmed if any of these content distribution channels discontinue, limit or place any additional restrictions on our access to their platforms, modify their terms of use or other policies, or charge API license fees for API access. In particular, content distribution channels update their API terms of use from time to time and new versions of these terms could impose additional restrictions on us and require us to modify our software to accommodate these changes. Any of these outcomes could cause demand for our solutions to decrease, our research and development costs to increase, and as a result, our business and results of operations could suffer.

The independent online marketing technology market is highly fragmented and intensely competitive. In addition, independent online marketing technology platforms face competitive pressure from well-established internet companies, marketing agencies and traditional media.

China’s independent online marketing technology market is highly competitive, fragmented and rapidly changing. With the introduction of new technologies and the influx of new entrants, we expect competition to continue and intensify, which could harm our ability to increase revenue and attain or sustain profitability. We believe the principal competitive factors in this industry include:

 

    ability to deliver return on marketing expenditure at scale;

 

    customer trust;

 

    geographic reach;

 

    breadth and depth of cooperation with publishers, ad exchanges, ad networks and other participants in the online marketing ecosystem;

 

    comprehensiveness of solutions and service offerings;

 

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    pricing structure and competitiveness;

 

    cross-channel capabilities;

 

    accessibility and user-friendliness of solutions; and

 

    brand awareness.

In addition, independent online marketing technology platforms face competitive pressure from large and well-established internet companies, such as Alibaba, Baidu, Tencent and Google, which have established stronger and broader presence across the online marketing ecosystem and have significantly more financial, technical, marketing and other resources, more extensive customer base, and longer operating histories and greater brand recognition than we do. These companies have access to user information by virtue of their popular consumer-oriented websites and mobile apps, and have the technology designed for use in conjunction with the types of user information collected from their websites and mobile apps. These companies may also leverage their positions to make changes to their systems, platforms, exchanges, networks or other products or services that could be harmful to our business and results of operations. While we believe that we do not directly compete with these large and well-established internet companies as we promote their content distribution opportunities or purchase their content distribution opportunities in the ordinary course of our business in connection with our execution of marketing campaigns, and these companies generally do not provide integrated online marketing solutions the way we do, they are major players in the online marketing technology industry as they provide online marketing technology and offer services and offer solutions that help marketers achieve one or more aspects of their marketing goals in one or more phases of their online marketing cycle. In addition, these large and well-established companies control content distribution channels and would directly compete with us should we vertically expand our business to own or operate content distribution channels in the future. Further, some of these companies are, or may also become, our content distribution channels and may enter into other types of strategic arrangements with us. For example, we generally enter into annual framework agreements with content distribution channel partners, including Baidu and Tencent, to purchase or promote their content distribution opportunities. See “Business — Our Content Distribution Channels”. Competitive pressure may incentivize them to cease their partnership with us. See “— Loss of any content distribution channel may materially and adversely affect our business and results of operations.” Online marketing technology platforms also face competition from marketing agencies, who may have their own relationships with content distribution channels and can directly connect marketers with such channels. Furthermore, online marketing technology platforms continue to compete with traditional media including direct marketing, television, radio, cable and print advertising companies.

New technologies and methods of online marketing present an evolving competitive challenge, as market participants upgrade or expand their service offerings to capture more marketing spend from marketers. In addition to existing competitors and their existing service offerings, we expect to face competition from new entrants to the online marketing technology industry and new service offerings from existing competitors. If existing or new companies develop, market or resell competitive high-value marketing technology solutions, acquire one of our competitors or strategic partners, form a strategic alliance or enter into exclusivity arrangement with one of our competitors or strategic partners, our ability to compete effectively could be significantly compromised and our business, results of operations and prospects could be materially and adversely affected.

If online marketing technology solutions do not achieve widespread market acceptance, our business, growth prospects and results of operations would be materially and adversely affected.

The market for online marketing technology solutions such as ours is evolving in China and these solutions may not achieve or sustain high levels of demand and market acceptance as we expect. While marketing via search engines or display channels has been established for several years, marketing via new digital channels such as mobile and social media is not as well established. The future growth of our business could be constrained by both the level of acceptance and expansion of emerging online marketing channels, as well as the

 

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continued use and growth of existing channels. Even if these channels become widely adopted, marketers and agencies may not be familiar with and make significant investments in, solutions such as ours that help them manage their online marketing across channels and devices. In addition, some of our solutions are delivered as software-as-a-service, or SaaS, offerings, which are less mature or common in China, and the pace of transition to SaaS business model may be slower among marketers with heightened data security concerns or general demand for highly customizable application software. The acceptance of our solutions delivered as SaaS offerings will depend to a substantial extent on the education of our customers on the SaaS offerings and the widespread adoption of SaaS solutions in general, and we cannot be certain that the trend of adoption of such solutions will continue in the future. Therefore, it is difficult to predict customer demand for our platform or the future growth rate and size of the market for online marketing technology solutions.

Expansion of the market for online marketing technology solutions depends on a number of factors, including the growth of new digital channels such as mobile and social media and the cost, as well as the performance and perceived value associated with online marketing technology solutions. If online marketing technology solutions do not achieve widespread acceptance, or there is a reduction in demand for online marketing caused by weakening economic conditions, decreases in corporate spending, technological challenges, data security or privacy concerns, governmental regulation, competing technologies and solutions or otherwise, our business, growth prospects and results of operations will be materially and adversely affected.

If our algorithms and data engines for assessing and predicting potential audience interaction with marketing content are flawed or ineffective, or if our platform fails to otherwise function properly, our reputation and market share would be materially and adversely affected.

Our ability to attract marketers to, and build trust in, our platform is significantly dependent on our ability to effectively assess and predict audience interest in, and therefore interaction with, relevant marketing content. We utilize our proprietary algorithms and data engines to track, process and analyze internet user data, forecast probability and nature of internet users’ potential engagement with a given marketing message, create and tailor the marketing message to specific user interest, and execute marketing campaigns based on parameters specified by our customers. Our proprietary algorithms and data engines take into account multiple kinds and sources of data, including data on users’ interest, intent, E-commerce and offline purchase behavior, social data, demographic data and campaign performance data, which we track using our proprietary tracking tools, from our marketers, publishers and ad exchanges in connection with marketing campaigns, and from collaboration with selected third-party data partners. The data we collect may not be relevant to all industries, and for certain industries, we may not have sufficient user data to ensure that our algorithms and data engines would work effectively. Furthermore, we generally do not verify the data we gather, which may be subject to fraud or are otherwise inaccurate. Even if such data are accurate, they may become irrelevant or outdated and thus may not reflect a user’s genuine interest or accurately predict his or her interaction with a given marketing message. For example, following the date we obtain the relevant data, a user’s interest and behavior pattern may change or he or she may have already completed a transaction and is no longer interested in the marketing message.

In addition, we expect to experience significant growth in the amount of data we process as we continue to develop new solutions and features to meet evolving and growing customer demands. As the amount of data and variables we process increases, the calculations that our algorithms and data engines must process become increasingly complex and the likelihood of any defect or error increases. To the extent our proprietary algorithms and data engines fail to accurately assess or predict a user’s interest in and interaction with, the relevant marketing content, or experience significant errors or defects, marketers may not achieve their marketing goals in a cost-effective manner or at all, which could make our platform less attractive to them, result in damages to our reputation and a decline of our market share and adversely affect our business and results of operations.

Our ability to collect and use data from various sources could be restricted.

The optimal performance of our algorithms and data engines depends on the data that we collect from multiple sources, which we use to build user profiles, develop and refine our algorithms and data engines. Our

 

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ability to collect and use these types of data is limited by a number of factors, some of which are described in further details elsewhere in this section, including:

 

    consumer choices, including the blocking or deletion of cookies or modifications to privacy settings;

 

    decisions by marketers, content distribution channels, or selected third party that we have data collaboration arrangement with, to restrict our ability to collect data from them, to refuse to implement mechanisms that we request to ensure compliance with our legal obligations;

 

    changes in browser or device functionality and settings, and other new technologies, which could make it easier for users to prevent the placement of cookies or other tracking technologies;

 

    new developments in law, regulations and industry standards on privacy and data protection regimes, including increased visibility of consent mechanisms as a result of these legal, regulatory or industry developments;

 

    the failure of our network or software systems, or the network or software systems of marketers;

 

    our inability to grow customer base in new industries and geographic markets in order to obtain the critical mass of data necessary for our algorithms and data engines to perform optimally in these new industries and geographies;

 

    our relationship with our data partners or certain key data sources, including major internet companies in China, which may stop providing or be unable to provide us data on terms acceptable to us; and

 

    interruptions, failures or defects in our data collection, mining, analysis and storage systems.

Any of the above described limitations on our ability to successfully collect and use data could materially impair the optimal performance of our algorithms and data engines as well as the efficiency of our solutions, which could make our platform less attractive to marketers and result in damages to our reputation, a decline of our market share and adversely affect our business and results of operations.

Blocking or deletion of cookies or other modifications to privacy settings on PCs and mobile devices could impair our data collection and effectiveness of our solutions.

Cookies that we place are generally regarded as “third party cookies” because we place them through internet browsers on an internet user when an internet user visit our website or a website owned by our marketers or other party that has given us permission to place cookies. Our cookies generally record non-personally identifiable information, including when a user views or clicks on a marketing message, where a user is located, how many marketing messages a user has seen, and browser or device information. We use data from cookies to help build user profiles that assess audience interest and predict audience potential interaction with a given marketing message. Cookies may easily be deleted or blocked by internet users. Commonly used internet browsers (Chrome, Firefox, Internet Explorer, and Safari) allow internet users to modify their browser settings to prevent cookies from being accepted by their browsers. Most browsers also now support temporary privacy modes that allow the user to suspend, with a single click, the placement of new cookies or reading or updates of existing cookies. Internet users can also delete cookies from their computers at any time. Some internet users also download free or paid “ad blocking” software that prevents certain cookies from being stored on a user’s computer. Further, certain web browsers, such as Safari, currently block or are planning to block some or all third-party cookies by default, as do Apple’s iPad and iPhones devices. Mobile devices based upon the Android operating system use cookies only in their web browser applications, so that cookies do not track Android users while they are using other applications on the device. If web browsers block, or internet users reject or delete, cookies, fewer of our cookies or our marketers’ cookies may be set in browsers or accessible in mobile devices, which could adversely affect our data collection and hence the optimal performance of our algorithms and data engines and effectiveness of our solutions.

Aside from blocking or deleting of cookies, other modifications to privacy settings on the PCs and mobile devices could limit or restrict our ability to collect and analyze data. For example, certain search engines, such as

 

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Google, provide an encrypted search function. Although we may still be able to see the amount of traffic brought to marketers’ website through the search engine, we will not be able to see the keywords that generate the traffic as the keywords are encrypted. This makes it more difficult for us to evaluate the effectiveness of keywords, and hence the effectiveness of our solutions may be compromised, which would result in customer departure and reputation damages, and materially and adversely affect our business and results of operations.

Regulatory, legislative or self-regulatory developments for online businesses, including privacy and data protection regimes, are expansive, not clearly defined and rapidly evolving. These laws and regulations could create unexpected costs, subject us to enforcement actions for compliance failures, or restrict portions of our business or cause us to change our technology platform or business model.

Governments around the world, including the PRC and Hong Kong governments, have enacted or are considering legislation related to online businesses. There may be an increase in legislation and regulation related to online marketing, the use of geo-location data to inform marketing, the collection and use of anonymous internet user data and unique device identifiers, such as IP address or mobile unique device identifiers, and other data protection and privacy regulation. Some of our competitors may have more access to lobbyists or governmental officials and may use that access to effect statutory or regulatory changes in a manner to commercially harm us while favoring their solutions. These laws and regulations could adversely affect the demand for or effectiveness and value of our solutions, force us to incur substantial costs or require us to change our business practices in a manner that could adversely affect our business and results of operations or compromise our ability to effectively pursue our growth strategies.

We primarily target Chinese language internet users in China for our marketers from all over the world. As a result, we may be directly or indirectly subject to the laws and regulations on online marketing, including data and privacy laws, of multiple jurisdictions. In recent years, the PRC government has enacted legislation on internet use to protect personal information from any unauthorized disclosure. For example, the Several Provisions on Regulating the Market Order of Internet Information Services, promulgated by the Chinese Ministry of Industry and Information Technology, or MIIT, stipulate that internet information service providers must not, without a user’s consent, collect the user’s personal information that can reveal the identity of the user whether by itself or when used in combination with other information, and must not provide any such information to third parties without prior consent from the user. In addition, internet information service providers shall inform their users about their service scope and shall not use users’ information beyond such scope or collect any other information that is irrelevant to the services they provide. In Hong Kong, the Hong Kong Personal Data Ordinance prohibits an internet company collecting information about its users, analyzing the information for a profile of the user’s interests or selling or transmitting the profiles to third parties for direct marketing purposes unless it has obtained the user’s consent. The European Union has adopted the EU e-Privacy Directive and is considering reforms to its existing data protection legal framework. In addition, the EU Directive 2009/136/EC, commonly referred to as the “Cookie Directive,” directs EU member states to ensure that accessing information on an internet user’s computer, such as through a cookie, is allowed only if the internet user has given his or her consent. The U.S. government has announced that it is reviewing the need for greater regulation of the collection of consumer information, including regulation aimed at restricting some targeted advertising practices.

We strive to comply with all applicable laws and regulations relating to privacy and data collection, processing, use, and disclosure. These laws and regulations are continually evolving, are not always clear, and are not always consistent across the jurisdictions in which we do business, and the measures we take to comply with these laws, regulations and industry standards may not always be effective. We may be subject to litigation or enforcement action or reduced demand for our solutions if we or our marketers fail to abide by applicable privacy laws or to provide adequate notice and/or obtain consent from end users. In addition, some of our content distribution channels require us to indemnify and hold them harmless from the costs or consequences of litigation resulting from using their networks. Any proceeding or perception of concerns relating to our collection, use, disclosure, and retention of data, including our security measures applicable to the data we collect, whether or not

 

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valid, could harm our reputation, force us to spend significant amounts on defense of these proceedings, distract our management, increase our costs of doing business and inhibit the use of our solutions, which could materially and adversely affect our business, results of operations and prospects.

We are subject to, and may expend significant resources in defending against, government actions and civil claims in connection with false, fraudulent, misleading or otherwise illegal marketing content for which we provide design, production or agency services.

Under PRC Advertising Law, where an advertising operator provides advertising design, production or agency services with respect to an advertisement when it knows or should have known that the advertisement is false, fraudulent, misleading or otherwise illegal, the competent PRC authority may confiscate the advertising operator’s advertising revenue from such services, impose penalties, order it to cease dissemination of such false, fraudulent, misleading or otherwise illegal advertisement or correct such advertisement, or suspend or revoke its business licenses under certain serious circumstances.

Under the PRC Advertising Law, “advertising operators” include any natural person, legal person or other organization that provides advertising design, production or agency services to advertisers for their advertising activities. Since our solutions involve provision of agency services to marketers, including helping them identify, engage and convert audience, and create content catering to their potential customers across different content distribution channels, we are deemed as an “advertising operator” under the PRC Advertising Law. Therefore, we are required to examine advertising content for which we provide agency services for compliance with applicable laws, notwithstanding the fact that the advertising content may have been previously published, and that the advertisers also bear liabilities for the content in their advertisements. In addition, for advertising content related to certain types of products and services, such as alcohol, cosmetics, pharmaceuticals and medical procedures, we are expected to confirm that the advertisers have obtained requisite government approvals, including operating qualifications, proof of quality inspection for the advertised products, government pre-approval of the content of the advertisements and filings with the local authorities. Although we have established internal policies to review and vet advertising content before it is placed on a content distribution channel to ensure compliance with applicable laws, we cannot ensure that each advertisement for which we provide agency services complies with all PRC laws and regulations relevant to advertising activities, that supporting documentation provided by our customers is authentic or complete, or that we are able to identify and rectify all non-compliances in a timely manner.

Moreover, civil claims may be filed against us for fraud, defamation, subversion, negligence, copyright or trademark infringement or other violations due to the nature and content of the information for which we provide design, production or agency services. For example, we generally represent and warrant in our contracts with content distribution channels as to the truthfulness of the advertising content that we place on these channels, and agree to indemnify the content distribution channels for any losses resulting from false, fraudulent, misleading or otherwise illegal advertising content that we place on these content distribution channels. On the other hand, not all our contracts with customers contain a back-to-back representation and warranty as to the truthfulness of the advertising content or an indemnity provision where the customers undertake to hold us harmless in case we incur losses arising out of any false, fraudulent, misleading or otherwise illegal advertising content. In the event we are subject to government actions or civil claims in connection with false, fraudulent, misleading or otherwise illegal marketing content for which we provide agency services, our reputation, business and results of operations may be materially and adversely affected.

If we are not able to grow efficiently to meet our customers’ increasing needs, our operating results could be harmed.

As usage of our solutions grows, we will need to devote additional resources to improving our system infrastructure. In addition, we will need to appropriately scale our internal business systems and our services organization, including account servicing staff, to serve marketers’ growing demands. We cannot assure you

 

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these improvements and expansions to our infrastructure and staff will be fully or effectively implemented on a timely basis, if at all. Even if we are able to upgrade our systems and expand our staff, such expansion may be expensive and complex and require our management’s time and attention. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure and expand our staff. Any of these could impair the performance of our platform, reduce customer satisfaction and lead to customer departure, which could harm our reputation and adversely affect our business and results of operations.

If we fail to offer high-quality account services, our business and reputation may suffer.

Our success in marketing and sale of our solutions and retention and expansion of customer base depends on our ability to maintain a consistently high level of customer services, customer education and technical support, which requires that our account servicing personnel have specific marketing domain knowledge and expertise. If we are unable to hire and train a sufficient number of support staff to provide effective and timely support to our customers, our customers’ appreciation of, or satisfaction with, our solutions may be adversely affected, resulting in reduced customer spending or departure and adversely affect our reputation and materially and adversely affect our business and results of operations.

If we fail to innovate, adapt and respond timely and effectively to rapidly changing technologies and new trends in online marketing, our solutions may become less competitive or obsolete.

Our future success will depend on our ability to continuously innovate, enhance and broaden our solutions to meet evolving marketing needs, and address technological advancements and new trends in online marketing, in particular the growing popularity of online marketing via mobile channel. We may not be able to timely identify and respond to these new trends. The design of mobile devices and operating systems is controlled by third parties with which we do not have any formal relationship. These parties frequently introduce new devices, and from time to time they may introduce new operating systems or modify existing ones. Network carriers may also restrict our ability to access specific content on mobile devices. If we fail to innovate or adapt our technologies and solutions so that they are compatible with these devices or operating systems, which in turn require that we maintain adequate research and development personnel and resources, our solutions may become less competitive or obsolete. In addition, any new solution that we develop may not receive wide acceptance as we anticipated. Any of these events could materially and adversely affect our business, results of operations and prospects.

If we are unable to protect our proprietary information or other intellectual property, our business could be adversely affected.

We rely on a combination of trademark and trade secret laws, and contractual restrictions, including through confidentiality, non-disclosure and assignment of invention assignment agreements with our key employees, consultants and third parties with whom we do business, to establish, maintain and protect our proprietary information and other intellectual property. Policing any misappropriation, unauthorized use or reverse engineering our proprietary information and other intellectual property is difficult and costly and the steps we have taken may be inadequate. For example, contractual restrictions may be breached, and we may not succeed in enforcing our rights or have adequate remedies for any breach of laws or contractual restrictions. In addition, we may not be able to enter into agreements or arrangements with everyone who has access to our proprietary information or contributes to the development of our intellectual property. Moreover, our trade secrets may be disclosed to or otherwise become known or be independently developed by competitors, and in these situations we may have no or limited rights to stop others’ use of our information. Furthermore, to the extent that our employees, consultants or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights to such intellectual property. If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it would have an adverse effect on our business, financial condition and results of operations.

 

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Our business may suffer if it is alleged or determined that our technologies or any other aspects of our business infringe on the intellectual property rights of others.

As we continue to expand and as litigation or other similar proceedings become more common in resolving commercial disputes, we face a higher risk of being subject to intellectual property infringement claims. Companies in the internet, technology and media industries are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights. The validity, enforceability and scope of protection of intellectual property rights in internet-related industries are uncertain and evolving. In particular, our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be infringing on other marks. At times, third parties may adopt trade names or trademarks similar to those of ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered or unregistered trademarks that are similar to our registered or unregistered trademarks or trade names. If a third party has been using in commerce any mark that is confusingly similar to our trade names or trademarks, or has registered any such marks, prior to our use or registration of our trade names or trademarks, such third party could potentially bring infringement claims against us depending on the territory of the use or registration. Any such claim would require us to incur significant costs to defend, and if we are unsuccessful, we may be subject to an injunction and/or required to pay significant damages or spend significant time and resources to rebrand any relevant products or services.

We have received in the past, and expect to receive in the future, notices that claim we have infringed, misappropriated or misused other parties’ trademark and other intellectual property rights. For example, in January 2015, iClick, Inc., a company incorporated in the state of Washington in the United States and the owner of a U.S. registered trademark for the term “iClick” filed an action in the United States District Court for the District of Colorado against one of our subsidiaries in Hong Kong, iClick Interactive Asia Limited, alleging trademark and trade name infringement and unfair competition, among others. The basis of iClick Inc.’s claims arose from iClick Interactive Asia Limited’s use of the name iClick in the United States. We believe these claims lacked merit, primarily because the parties offer different goods and services, and therefore any chance of consumer confusion is remote. However, to avoid the costs and uncertainty of litigation, we settled the lawsuit in January 2016. Furthermore, we have not conducted any trademark clearance searches in the United States nor have we obtained any registrations or filed any applications for the registration of our trade names or trademarks in the United States. Although common law and federal law in the United States provide unregistered mark in use in the United States with protection against infringement, such protection is only limited to the geographic areas where such mark is in use. Therefore, we may not be able to effectively enforce and protect our trade names or trademark throughout the United States. Any litigation or other proceedings on intellectual property rights could be costly, time-consuming, divert management resources, and may impede our ability to use existing or develop new technologies or expand into new markets, any of which could have a material adverse effect upon our business and results of operations.

Past and future acquisitions, strategic investments, partnership or alliance could be difficult to integrate, divert the attention of key management personnel, disrupt our business, dilute shareholder value and adversely affect our results of operations and financial condition.

In July 2015, we acquired OptAim, a mobile marketing business. Since the acquisition, we have substantially expanded our mobile marketing business, with OptAim’s complementary mobile analytics, attribution technologies, and content distribution channel partners that allow marketers to track and optimize marketing campaigns on mobile channels. There can be no assurance that we will be successful in fully integrating, utilizing and leveraging OptAim’s business and technologies to further expand our mobile business and cross-channel capabilities, which may adversely affect our ability to achieve growth and business objectives, and have a material adverse effect upon our business and results of operations.

In addition, future acquisitions, strategic investments, partnerships or alliances could be difficult to integrate, divert the attention of key management personnel, disrupt our business, dilute shareholder value and

 

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adversely affect our business and results of operations. We have limited experience in acquiring and integrating businesses, products and technologies. If we identify an appropriate acquisition candidate, we may not be successful in negotiating the terms and/or financing of the acquisition, and our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or client issues. Any acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt. In addition, acquisitions, including our recent acquisitions of OptAim, involve numerous risks, any of which could harm our business, including:

 

    difficulties in integrating the operations, technologies, services and personnel of acquired businesses, especially if those businesses operate outside of our core competency;

 

    cultural challenges associated with integrating employees from the acquired company into our organization;

 

    reputation and perception risks associated with the acquired product or technology by the general public;

 

    ineffectiveness or incompatibility of acquired technologies or solutions;

 

    potential loss of key employees of acquired businesses;

 

    inability to maintain the key business relationships and the reputations of acquired businesses;

 

    diversion of management’s attention from other business concerns;

 

    litigation for activities of the acquired company, including claims from terminated employees, clients, former shareholders or other third parties;

 

    failure to identify all of the problems, liabilities or other shortcomings or challenges of an acquired company, technology, or solution, including issues related to intellectual property, solution quality or architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or client issues;

 

    in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

 

    costs necessary to establish and maintain effective internal controls for acquired businesses;

 

    failure to successfully further develop the acquired technology in order to recoup our investment; and

 

    increased fixed costs.

If we are unable to successfully fully integrate any future business, product or technology we acquire, our business, financial conditions and results of operations may suffer.

We may be required to record significant impairment charges as a result of our acquisition of OptAim.

As of December 31, 2016, we had US$48.5 million of goodwill, which represented approximately 28.6% of our total assets, the majority of which was related to OptAim and its subsidiaries, VIE and VIE’s subsidiary. Goodwill is recorded at fair value and is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators arise. In evaluating the potential for impairment of goodwill, we make assumptions regarding future operating performance, business trends, and market and economic conditions. Such analyzes further require us to make judgmental assumptions about sales, operating margins, growth rates, and discount rates.

 

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There are inherent uncertainties related to these factors and to management’s judgment in applying these factors to the assessment of goodwill recoverability. Any possible changes in our judgmental assumptions on which the recoverability of goodwill is based would cause a change in the recoverable amounts of goodwill. In addition, we could be required to evaluate the recoverability of goodwill prior to the annual assessment if there are any impairment indicators, including experiencing disruptions to the business, unexpected significant declines in operating results, divestiture of a significant component of our business or market capitalization declines, any of which could be caused by our failure to manage OptAim or to successfully integrate its operations with our other operations. Impairment charges could negatively affect our reported earnings and financial ratios in the periods of such charges and limit our ability to obtain financing in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – the Effect of Our Acquisition of OptAim” and “— Critical Accounting Policies — Impairment of Goodwill” for more information.

If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing our consolidated financial statements for the years ended December 31, 2015 and 2016, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting as well as other control deficiencies, in accordance with the standards established by the Public Company Accounting Oversight Board of the United States, or the PCAOB.

As defined in the standards established by the PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis. The two material weaknesses identified relate to (1) the lack of sufficient accounting personnel with appropriate understanding of U.S. GAAP and SEC reporting requirements, and (2) the lack of a comprehensive accounting policies and procedures manual to facilitate preparation of U.S. GAAP financial statements, which inhibits our subsidiaries’ ability to prepare consolidation from local books based on PRC GAAP and Hong Kong Financial Reporting Standards to their U.S. GAAP basis information for group financial reporting and imposes a risk that adjustments to U.S. GAAP are not identified in a timely manner. We have taken measures and plan to continue to take measures to remediate these weaknesses. For details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internal Control Over Financial Reporting.” However, the implementation of these measures may not fully address the material weaknesses and other control deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct the material weaknesses and other control deficiencies, or our failure to discover and address any other control deficiencies could result in inaccuracies in our financial statements, and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis.

Neither we nor our independent registered public accounting firm has undertaken a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses, significant deficiencies and other control deficiencies in our internal control over financial reporting as we and they will be required to do once we become a public company. In light of the number of material weaknesses and other control deficiencies that were identified as a result of the limited procedures performed, we believe it is possible that, had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified.

Upon completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we

 

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include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2018. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.

Failures or disruption in any systems, software or hardware infrastructure supporting our platform and solutions could significantly disrupt our operation and cause us to lose customers.

The optimal performance of our solutions relies on the continued and uninterrupted performance of our systems, software and hardware infrastructure, and security and integrity of our data. They are vulnerable to damages from a variety of sources, some of which are out of our control, including telecommunications failures, power outages, cyber-attacks, or other malicious human acts and natural disasters. Any steps we take to increase the reliability and redundancy of our systems, software and hardware infrastructure supporting our platform and solutions and to improve the security of our data assets may be expensive and may not be successful in preventing system failures or disruption. For example, techniques used to obtain unauthorized access to or sabotage our data or otherwise hack our systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. Sustained or repeated failures or disruption in our systems, including from security breaches, whether actual or perceived, could significantly reduce the attractiveness of our solutions, harm our reputation, result in our liabilities and have a material adverse effect on our business and results of operations.

In addition, our business may be negatively affected by interruptions or delays in services provided by third-party system or infrastructure providers that we rely upon. We currently lease data centers and utilize related equipment and services from third-party data center providers. All of our data gathering and analytics are conducted on, and the marketing content we deliver are processed through, our servers located in these data centers and their cloud. We also rely on bandwidth providers and internet information service providers to deliver marketing content. While we have disaster recovery arrangements in place, our testing in actual disasters or similar events is limited and any damage to, or failure of, the systems or facilities of our third-party providers, including as a result of any occurrence of a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close any data center or the facilities of any other third-party provider without adequate notice, or other unanticipated problems at these facilities, could adversely impact our ability to deliver our solution to marketers and have a material adverse effect on our business and results of operations.

 

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Our inability to use software licensed from third parties, including open source software could negatively affect our ability to sell our solutions and subject us to possible litigation.

Our technology platform incorporates software licensed from third parties, including open source software, which we use without charge. Although we monitor our use of open source software, the terms of many open source licenses to which we are subject have not been interpreted by courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our solution to our customers. In addition, the terms of open source software licenses may require us to provide software that we develop using such software to others on unfavorable license terms. For example, certain open source licenses may require us to offer the components of our platform that incorporate the open source software for free, to make available source code for modifications or derivative works we create based upon, incorporating or using the open source software, and to license such modifications or derivative works under the terms of the particular open source license.

In the future, we could be required to seek licenses from third parties in order to continue offering our solution, in which case licenses may not be available on terms that are acceptable to us, or at all. Alternatively, we may need to re-engineer our solutions or discontinue use of portions of the functionality provided by our solutions. Our inability to use third-party software could result in disruptions to our business, or delays in the development of future offerings or enhancements of our existing platform, which could materially and adversely affect our business and results of operations.

If we fail to detect fraud or serve marketers’ marketing content on undesirable websites, our reputation will suffer, which would harm our brand and negatively impact our business and results of operations.

Our business depends in part on providing marketers with solutions that they can trust, and we have contractual commitments to take reasonable measures to prevent marketer’s marketing content from appearing on undesirable websites. We use proprietary technologies and third party services to detect click fraud and block inventory on websites with inappropriate content. However, technologies utilized by bad actors are constantly evolving. Preventing and combating fraud and inappropriate content requires constant vigilance and investment of time and resources. We may not always be successful in our efforts to do so. If we serve marketing content on websites that are objectionable to marketers, or inadvertently purchase content distribution opportunities for marketers that proves to be unacceptable for their marketing campaigns, such as fraudulent bot generated impressions, we may lose business and incur damages to our brand and reputation. In addition, we may be exposed to liabilities or the need to provide credits or refunds to our customers, and our business and results of operations may be harmed.

Any negative publicity with respect to us, the online marketing industry in general or our partners may materially and adversely affect our reputation, business and results of operations.

Complaints, litigation, regulatory actions or other negative publicity that arise about the online marketing industry in general or our company in particular, including on the quality, effectiveness and reliability of online marketing solutions, privacy and security practices, and online marketing content, even if inaccurate, could adversely affect our reputation and customer confidence in, and the use of, our solutions. Harm to our reputation and customer confidence can also arise for many other reasons, including employee misconduct, misconduct of our data and content distribution channel partners, data center providers or other counterparties, failure by these persons or entities to meet minimum quality standards or otherwise fulfill their contractual obligations or to comply with applicable laws and regulations. Additionally, negative publicity with respect to our data or content distribution channel partners could also affect our business and results of operation to the extent that we rely on these partners or if marketers or marketing agencies associate our company with such partners.

 

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If we fail to promote or maintain our brand in a cost-efficient manner, our business and results of operations may be harmed.

We believe that developing and maintaining awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our solutions, and is an important element in attracting new customers and partners. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on our ability to deliver value propositions to marketers and on the effectiveness of our marketing efforts. In the past, our efforts to build our brand have involved significant expenses and promotion of our brand may be subject to restrictions and challenges. For example, as part of the settlement of the trademark infringement lawsuit brought by iClick, Inc. in January 2015, although we are free to use the term “iClick” in connection with our business in the United States, we are subject to ongoing obligations and restrictions to certain types of marketing and promotion that contain that term. In addition, our brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers and our business and results of operations can be materially and adversely affected.

Misconduct, errors and failure to function by our employees could harm our business and reputation.

We are exposed to many types of operational risks, including the risk of misconduct and errors by our employees. Our business depends on our employees to process a large number of marketing campaigns orders, which involve the use of audience data and marketers’ business information. We could be materially adversely affected if such data or information was disclosed to unintended recipients or if we experience an operational breakdown or failure in the processing of a marketing campaign whether as a result of human error, a purposeful sabotage or a fraudulent manipulation of our operations or systems. We could also be materially adversely affected if our employees absconded with our proprietary data or used our know-how to compete with us. Although employees have left our company in the past and may have violated the non-compete and non-solicitation clauses in their employment agreements with little impact on our business, future violations of these clauses could have a material adverse effect on our business. Any of these occurrences could result in our diminished ability to operate our business, potential liability to our customers, inability to attract future customers, reputational damage, regulatory intervention and financial harm, which could negatively impact our business and results of operations.

We may not be able to obtain additional capital when desired, on favorable terms or at all.

We intend to continue to make investments to support our business growth and may require additional funds, beyond those generated by this offering, to respond to business challenges, including the need to develop new features or enhance our platform and solutions, improve our operating and technology infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in public or private equity, equity-linked or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our ordinary shares. Any debt financing that we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, including the ability to pay dividends. This may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and respond to business challenges could be significantly impaired, and our business and prospects could be adversely affected.

 

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If we do not retain our senior management team, including our founders, and key employees, or attract additional technology and sales talents, we may not be able to sustain our growth or achieve our business objectives.

Our future success is substantially dependent on the continued service of our senior management team, including our founders, Sammy Hsieh, Ricky Ng and Jian Tang. Our management team is currently spread across multiple physical locations and geographies, which can strain the organization and make coordinated management more challenging. Our future success also depends on our ability to continue to attract, retain and motivate highly skilled employees, particularly employees with technical skills that enable us to deliver effective marketing solutions, and sales and marketing, and publisher development and support personnel with experience in online marketing. Competition for these employees in our industry is intense. As a result, we may be unable to attract or retain these management, technical, sales and marketing and publisher development and support personnel who are critical to our success, resulting in harm to our key marketer and publisher relationships, loss of key information, expertise or proprietary knowledge and unanticipated recruitment and training costs. The loss of the services of our senior management or other key employees could make it more difficult to successfully operate our business and pursue our business goals.

Increases in labor costs in the PRC may adversely affect our business and results of operations. Most of our employees are based in China. Chinese economy has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs to our users by increasing the fees of our services, our financial condition and results of operations may be adversely affected.

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide solutions and services on our platform. Our business could also be adversely affected by the effects of Ebola virus disease, Zika virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome, or SARS, or other epidemics. Our business operations could be disrupted if any of our employees is suspected of having Ebola virus disease, Zika virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.

Most of our system hardware and back-up systems are hosted in leased facilities in Hong Kong, Shanghai, Beijing, Guangzhou and Zhejiang province, and most of our directors, senior management and employees are based in Hong Kong, Shanghai and Beijing. Therefore, if any of the above-mentioned natural disasters, health epidemics or other outbreaks were to occur in these regions, our operations may experience material disruptions, such as temporary closure of our offices and suspension of services, which may materially and adversely affect our business and results of operations.

We do not have any business insurance coverage.

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we do not have any business liability or

 

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disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our business and results of operations.

Risks Related to Our Corporate Structure

We will continue to rely on the contractual arrangements that establish the structure for certain of our operations in China.

Foreign ownership in advertising business used to be subject to certain restrictions under the PRC laws and regulations. For example, according to the Administrative Provisions on Foreign-Invested Advertising Enterprises, which were abolished in June 2015, foreign investors were required to meet several conditions in order to invest in PRC advertising business, such as a minimum number of years of advertising-related experience and an approval from the relevant PRC regulatory authority. OptAim, which we acquired in July 2015, is a Cayman Islands company and OptAim Beijing, its PRC subsidiary, is considered a foreign invested enterprise, or FIE. To comply with the then-effective PRC laws and regulations, including the Administrative Provisions on Foreign-Invested Advertising Enterprises, OptAim Beijing entered into a set of contractual arrangements with OptAim Network and its shareholders. For a detailed description of these contractual arrangements, see “Corporate History and Structure.” As a result of these contractual arrangements, we exert control over OptAim Network and its wholly owned subsidiary, Zhiyunzhong, and consolidate their operating results in our financial statements under U.S. GAAP.

We are in the process of transferring the business operated by our VIE, OptAim Network, to our wholly owned subsidiaries. We expect that by the end of 2018, OptAim Beijing will replace OptAim Network as contracting party for all our mobile audience solution business that are operated by OptAim. However, we cannot assure you that such transition will be completed in a timely manner or at all as some of our customers may not be willing to enter into contracts with a new signing entity or OptAim Beijing may not have the necessary infrastructure to support the transition of all our mobile audience solution business operated by OptAim. Therefore, OptAim may continue to conduct part of its business in China through the contractual arrangements between OptAim Beijing, OptAim Network and its shareholders. In 2016, OptAim contributed 44.8% to our gross billing and 53.6% of our net revenues.

Under the Measures on the Administration of Foreign-related Surveys, or the Foreign-related Surveys Measures, promulgated by the National Bureau of Statistics of China on October 13, 2004, no individual or organization may conduct any foreign-related survey without a license for foreign-related survey granted by the National Bureau of Statistics in China or its local counterparts. We collect and use multiple kinds of data from multiple sources in China to improve the cost-effectiveness of marketing campaigns for our customers and marketers in and outside China. There are uncertainties whether such activities fall within the scope of “foreign-related surveys” under the Foreign-related Surveys Measures for which a foreign-related survey license is required. Under the Catalogue for the Guidance of Foreign Investment Industries, promulgated by the Ministry of Commerce and National Development and Reform Commission on March 10, 2015, only a domestic enterprise or a sino-foreign enterprise which meets the several requirements stipulated in the Foreign-related Surveys Measures can apply for a license for the foreign-related survey. In light of these uncertainties and out of prudence, we, through our VIE OptAim Network applied for and was granted a foreign-related survey license on June 6, 2017 by the Chinese National Bureau of Statistics. Therefore, we will continue to rely on OptAim Bejing’s contractual arrangements with OptAim Network and its shareholders to conduct certain of our operations in China, to the extent these operations may be deemed as foreign-related survey.

In the opinion of our PRC counsel, Jingtian & Gongcheng, our current ownership structure, the ownership structure of our PRC subsidiaries, our consolidated variable interest entity and its subsidiary, and the contractual

 

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arrangements among OptAim Beijing, OptAim Network and the shareholders of OptAim Network are not in violation of existing PRC laws, rules and regulations; and these contractual arrangements are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect. However, Jingtian & Gongcheng has also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately take a view that is consistent with the opinion of our PRC counsel.

It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. In particular, in January 2015, the Ministry of Commerce, or the MOC, published a discussion draft of the proposed Foreign Investment Law for public review and comments. Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. Under the draft Foreign Investment Law, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not taken a position on what actions will be taken with respect to the existing companies with the “variable interest entity” structure, whether or not these companies are controlled by Chinese parties. It is uncertain when the draft would be signed into law and whether the final version would have any substantial changes from the draft. See “Regulation — Regulations on Foreign Investment” and “— Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.” If the ownership structure, contractual arrangements and business of our company, our PRC subsidiaries or our consolidated variable interest entity and its subsidiary are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain or maintain any of the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of our PRC subsidiaries, consolidated variable interest entity or its subsidiary, revoking the business licenses or operating licenses of our PRC subsidiaries, consolidated variable interest entity or its subsidiary, shutting down our servers or blocking our online platform, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from this offering to finance our business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business and results of operations. If any of these occurrences results in our inability to direct the activities of our consolidated variable interest entity and its subsidiary, and/or our failure to receive economic benefits from our consolidated variable interest entity and its subsidiary, we may not be able to consolidate their results into our consolidated financial statements in accordance with U.S. GAAP.

We rely on contractual arrangements with our variable interest entity and its shareholders for certain of our business operations, which may not be as effective as direct ownership in providing operational control.

We have relied and expect to continue to rely on contractual arrangements with our variable interest entity, OptAim Network, and its shareholders for part of our online marketing business on mobile channels in China, as well as certain other complementary businesses, subject to the completion of the transfers of all the customer contracts of our VIE entity to our wholly owned PRC subsidiary, and to the extent our operations are deemed as foreign-related survey. For a description of these contractual arrangements, see “Corporate History and Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated variable interest entity and its subsidiary.

If we had direct ownership of OptAim Network and Zhiyunzhong, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of OptAim Network and Zhiyunzhong, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by OptAim Network and

 

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the shareholders of OptAim Network of their obligations under the contracts to exercise control over our consolidated variable interest entity and its subsidiary. The shareholders of our consolidated variable interest entity may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with OptAim Network and its shareholders. In addition, if any third party claims any interest in such shareholders’ equity interests in OptAim Network, our ability to exercise shareholders’ rights or foreclose the share pledge according to the contractual arrangements may be impaired. Therefore, our contractual arrangements with our consolidated variable interest entity may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

Any failure by our variable interest entity or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

If our consolidated variable interest entity or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of OptAim Network were to refuse to transfer their equity interest in OptAim Network to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations. In addition, if any third parties claim any interest in such shareholders’ equity interests in OptAim Network, our ability to exercise shareholders’ rights or foreclose the share pledge according to the contractual arrangements may be impaired.

All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is different from some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated variable interest entity and its subsidiary, and our ability to conduct our business may be negatively affected.

The shareholders of our variable interest entity, may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

The equity interests of OptAim Network are held by Mr. Jian Tang, who is our co-founder, director, chief operating officer and chief technology officer, and Ms. Jie Jiao, who is our chief financial officer. Their interests may differ from the interests of our company as a whole. These shareholders may breach, or cause our consolidated variable interest entity to breach, or refuse to renew the existing contractual arrangements we have with them and our consolidated variable interest entity, which would have a material adverse effect on our ability to effectively control our consolidated variable interest entity and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with OptAim Network to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements

 

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to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.

Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the second amended and restated exclusive option agreement with these shareholders to request them to transfer all of their equity interests in OptAim Network to a PRC entity or individual designated by us, to the extent permitted by PRC laws. If we cannot resolve any conflict of interest or dispute between us and the shareholders of OptAim Network, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

Contractual arrangements in relation to our variable interest entity may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC variable interest entity owe additional taxes, which could negatively affect our results of operations and the value of your investment.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between our wholly owned subsidiary OptAim Beijing, our variable interest entity OptAim Network and the shareholders of OptAim Network were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust OptAim Network’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by OptAim Network for PRC tax purposes, which could in turn increase their tax liabilities without reducing OptAim Beijing’s tax expenses. In addition, if OptAim Beijing requests the shareholders of OptAim Network to transfer their equity interests in OptAim Network at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject OptAim Beijing to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on OptAim Network for the adjusted but unpaid taxes according to the applicable regulations. Our results of operations could be materially and adversely affected if OptAim Network’s tax liabilities increase or if they are required to pay late payment fees and other penalties.

Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

The MOC published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The MOC is currently soliciting comments on this draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.

Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered an FIE. The draft

 

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Foreign Investment Law specifically provides that entities established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry clearance by the MOC, treated as a PRC domestic investor provided that the entity is “controlled” by PRC entities and/or citizens. According to the draft Foreign Investment Law, once an entity is determined to be an FIE, it will be subject to the foreign investment restrictions or prohibitions set forth in a “catalogue of special administrative measures,” which is classified into the “catalogue of prohibitions” and “the catalogue of restrictions”, to be separately issued by the State Council later. Foreign investors are not allowed to invest in any sector set forth in the catalogue of prohibitions. Please see “Regulation — Regulations on Foreign Investment” for more details.

The draft Foreign Investment Law does not indicate what actions shall be taken with respect to companies with an existing VIE structure, whether or not these companies are controlled by Chinese parties. Moreover, it is uncertain whether the “catalogue of special administrative measures” to be issued will differ from the Catalogue for the Guidance of Foreign Investment Industries (Revised in 2015), or the 2015 Catalogue, and re-impose foreign investment restrictions or prohibitions on online marketing industry or advertising industry. If the enacted version of the Foreign Investment Law and the final “catalogue of special administrative measures” mandate further actions, such as the MOC market entry clearance, to be completed by companies with an existing VIE structure like us, and if online marketing industry or advertising industry becomes once again subject to the foreign investment restrictions or prohibitions or if our operations are deemed as foreign-related survey, we will face uncertainties as to whether such clearance can be timely obtained, or at all. If we are not able to obtain such clearance when required, our VIE structure may be regarded as invalid and illegal. As a result, we would not be able to (i) continue our business in China through our contractual arrangements with OptAim Network and Zhiyunzhong, (ii) exert control over OptAim Network, (iii) receive the economic benefits of OptAim Network under such contractual arrangements, or (iv) consolidate the financial results of OptAim Network and Zhiyunzhong. Were this to occur, our results of operations and financial condition would be materially and adversely affected.

The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from an investment information report required at each investment, and investment amendment reports, which shall be submitted upon alteration of investment specifics, it is mandatory for entities established by foreign investors to submit an annual report, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.

If we exercise the option to acquire equity ownership of OptAim Network, the ownership transfer may subject us to certain limitation and substantial costs.

Pursuant to the contractual arrangements, OptAim Beijing has the exclusive right to purchase all or any part of the equity interests in OptAim Network from OptAim Network’s shareholders for a nominal price, unless the relevant government authorities or then applicable PRC laws request that a minimum price amount be used as the purchase price, in such case the purchase price shall be the lowest amount under such request. The shareholders of OptAim Network will be subject to PRC individual income tax on the difference between the equity transfer price and the then current registered capital of our consolidated variable interest entity. Additionally, if such a transfer takes place, the competent tax authority may require OptAim Beijing to pay enterprise income tax for ownership transfer income with reference to the market value, in which case the amount of tax could be substantial.

 

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Risks Related to Doing Business in China

Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us.

The PRC legal system is based on written statutes. Unlike common law legal systems, prior court decisions may be cited for reference but have limited precedential value. The PRC legal system evolves rapidly, and the interpretations of many laws, regulations and rules may contain inconsistencies and enforcement of these laws, regulations and rules involves uncertainties.

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations. Litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.

Our primary operations are based in, and a substantial percentage of our revenue is generated from, China. Accordingly, our business, prospects, financial condition and results of operations may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, the Chinese economy has slowed down. Any adverse changes in economic conditions in China, in the policies of the PRC government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services and adversely affect our competitive position.

 

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A downturn in the Chinese or global economy could reduce the demand for our solutions, which could materially and adversely affect our business and results of operations.

The global financial markets have experienced significant disruptions since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from the lows of 2008 and 2009 has been uneven and is facing new challenges, including the escalation of the European sovereign debt crisis from 2011 and the slowdown of the Chinese economy since 2012. It is unclear whether the Chinese economy will resume its high growth rate. Furthermore, the government of the United Kingdom held an in-or-out referendum on its membership in the European Union on June 23, 2016. The referendum resulted in a vote in favor of the exit of the United Kingdom from the European Union (“Brexit”). The uncertainty caused by Brexit could negatively impact all of the economies and market conditions of the European Union and/or worldwide, and could continue to contribute to instability in the global financial markets. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have also been concerns over unrest in Ukraine, the Middle East and Africa, which have resulted in volatility in financial and other markets. There have also been concerns about the economic effect of the tensions in the relationship between China and surrounding Asian countries. Economic conditions in China are sensitive to global economic conditions. Any prolonged slowdown in the global or Chinese economy may reduce the demand for our solutions and have a negative impact on our business, results of operations and financial condition. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.

We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.

We are a Cayman Islands exempted limited liability company, used as a holding company, and we rely principally on dividends and other distributions on equity from our PRC subsidiaries for our cash requirements, including payment of dividends and other cash distributions to holders of our ordinary shares and services of any debt we may incur. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Under PRC laws and regulations, our PRC subsidiaries, as wholly foreign-owned enterprises in China, may pay dividends only out of their respective accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

In addition, the PRC tax authorities may require our PRC subsidiaries to adjust its taxable income under the contractual arrangements it currently has in place with our consolidated variable interest entity in a manner that would materially and adversely affect their ability to pay dividends and other distributions to us.

Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration with relevant governmental authorities in China. According to

 

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the relevant PRC regulations on foreign-invested enterprises in China, capital contributions to our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, or FICMIS, and registration with other governmental authorities in China. In addition, (a) any foreign loan procured by our PRC subsidiaries is required to be registered with the State Administration of Foreign Exchange, or SAFE, or its local branches, and (b) each of our PRC subsidiaries may not procure loans which exceed the difference between its registered capital and its total investment amount as recorded in FICMIS. Any medium or long term loan to be provided by us to our variable interest entity must be recorded and registered by the National Development and Reform Committee and the SAFE or its local branches. We may not complete such recording or registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries. If we fail to complete such recording or registration, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

In 2008, the SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, which used to regulate the conversion by foreign-invested enterprises of foreign currency into Renminbi by restricting the usage of converted Renminbi. On March 30, 2015, the SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19. SAFE Circular 19 took effect as of June 1, 2015 and superseded SAFE Circular 142 on the same date. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises and allows foreign-invested enterprises to settle their foreign exchange capital at their discretion, but continues to prohibit foreign-invested enterprises from using the Renminbi fund converted from their foreign exchange capitals for expenditure beyond their business scopes, investment in security market, offering of entrustment loans or purchase of any investment properties. On June 9, 2016, the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange Settlement, or SAFE Circular 16, was promulgated. In addition to restating the general principles of SAFE Circular 19, SAFE Circular 16 explicitly stipulates that foreign debts and repatriated funds raised through overseas listings as foreign exchange receipts can be settled discretionally. SAFE Circular 16 continues to prohibit foreign-invested enterprises from using the Renminbi funds converted from their foreign exchange capitals for expenditures beyond their business scopes, investments in security market, offerings of entrustment loans or purchases of any investment properties. Although SAFE Circular 16 further relaxes the control over foreign exchange settlement of capital accounts, in practice, there are still several specific requirements that limit the abilities of PRC enterprises to access the offshore financing capitals, which may adversely affect our business, financial conditions and operating results.

Fluctuations in exchange rates could have a material adverse effect on our results of operations and the price of our ADSs.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions in China and by China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi

 

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internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. In addition, the People’s Bank of China may, from time to time, release policies and measures concerning the foreign exchange market to limit fluctuations in Renminbi exchange rates and for other policy considerations.

A substantial portion of our revenues and costs are denominated in Renminbi, whereas our reporting currency is the U.S. dollar. Any significant depreciation of the Renminbi may materially and adversely affect our revenues, earnings and financial position as reported in U.S. dollars. To the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have an adverse effect on the U.S. dollar amount available to us.

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.

Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive a substantial portion of our revenues in Renminbi. Under our current corporate structure, our company in the Cayman Islands relies on dividend payments from our PRC subsidiaries and HK subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from the SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our company who are PRC residents. However, approval from or registration with appropriate government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies, as enterprises shall duly file the cross-border financing contracts according to the Circular of the People’s Bank of China on Matters relating to the Macro-prudential Management of Full-covered Cross-border Financing for the Issuance of Foreign Debts by Enterprise, or Circular on Management of Cross-border Financing, effective on January 10, 2017, and any medium or long term loan to be provided by foreign entities to domestic enterprises must be recorded and registered by the National Development and Reform Committee, or the NDRC, according to the Circular on Promoting the Administrative Reform of the Record-filing and Registration System for the Issuance of Foreign Debts by Enterprises, or Circular on Promoting the Administrative Reform, by the NDRC on September 14, 2015.

In light of the flood of capital outflows of China in 2016 due to the weakening Renminbi, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement. More restrictions and substantial vetting process are put in place by the SAFE to regulate cross-border transactions falling under the capital account. The PRC government may at its discretion further restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control

 

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system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

PRC regulations relating to investments in offshore special purposes companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits.

The SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014. SAFE Circular 37 requires PRC residents to register with the local SAFE branches in connection with their direct establishment or indirect control of any offshore entity, referred to in SAFE Circular 37 as a “special purpose vehicle”, for the purpose of overseas investment and financing with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. SAFE Circular 37 requires further registrations in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material events. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill this required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and it may be restricted from contributing additional capital into its PRC subsidiaries. Moreover, failure to comply with the various SAFE registration requirements described above could result in liabilities under PRC law for evasion of foreign exchange controls. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015 by the SAFE, local banks shall examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration under SAFE Circular 37 since June 1, 2015. Beneficial owners of the special purpose vehicle who are PRC citizens are also required to make annual filing with the local banks regarding their overseas direct investment status.

Certain beneficiary owners of our shares who are PRC residents, including Jiping Liu, have not completed their registration with the SAFE for their beneficial ownership of our shares. Moreover, we do not have control over our beneficial owners and may not be aware of the identities of all of our beneficial owners. We cannot assure you that all of our PRC-resident beneficial owners comply with SAFE Circular 37 and subsequent implementation rules. The failure of our beneficial owners who are PRC residents to register or amend their foreign exchange registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or comply with relevant requirements may also limit our ability to contribute capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. These risks may have a material adverse effect on our business, financial condition and results of operations.

The M&A rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A rules, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that the Ministry of Commerce of the People’s Republic of China, or the MOFCOM, be notified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on

 

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Thresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council in 2008, were triggered. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress of the PRC, which became effective in 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the MOFCOM before they can be completed. In addition, the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors which became effective in September 2011 require acquisitions by foreign investors of PRC companies engaged in military related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. We may pursue potential strategic acquisitions that are complementary to our business and operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to the SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In the meantime, our directors, executive officers and other employees who are PRC citizens or who are non-PRC residents residing in the PRC for a continuous period of not less than one year, subject to limited exceptions, and who have been granted incentive share awards by us, may follow the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, promulgated by the SAFE in 2012, or the 2012 SAFE Notices. Pursuant to the 2012 SAFE Notices, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with the SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options will be subject to these regulations when our company becomes an overseas listed company upon the completion of this offering. Failure to complete the SAFE registrations may subject them to fines, and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Regulation — Regulations on Foreign Exchange — Equity Incentive Plans.”

The State Administration of Taxation, or SAT, has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities. See “Regulation — Regulations on Foreign Exchange — Equity Incentive Plans.”

 

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Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. We have not made adequate employee benefit payments. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the SAT issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular applies only to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Taxation — People’s Republic of China Taxation.” However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body. As a majority of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities determine that iClick Interactive Asia Group Limited or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then iClick Interactive Asia Group Limited or such subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, income and any gains realized in respect to our ordinary shares or ADSs may be deemed by the PRC tax authorities as income or gain, as the case may be, arising from sources within the PRC, as described immediately below.

 

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You may be subject to PRC income tax on dividends from us or on any gain realized on the transfer of our ordinary shares.

Under the EIT Law and its implementation rules, subject to any applicable tax treaty or similar arrangement between the PRC and our shareholders’ jurisdictions of residence that provide for a different income tax arrangement, PRC withholding tax at the rate of 10% is generally applicable to dividends from PRC sources paid to shareholders that are non-PRC resident enterprises, which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business. Any gain realized on the transfer of shares by such shareholders is subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC unless a treaty or similar arrangement otherwise provides. Under the PRC Individual Income Tax Law and its implementation rules, dividends from sources within the PRC paid to foreign individual investors who are not PRC residents are generally subject to a PRC withholding tax at a rate of 20% and gains from PRC sources realized by such investors on the transfer of shares are generally subject to 20% PRC income tax, in each case, subject to any reduction or exemption set forth in applicable tax treaties and PRC laws.

As described in the preceding risk factor, there is a risk that we will be treated by the PRC tax authorities as a PRC tax resident enterprise. In that case, dividend income and gains from sales of our shares or ADSs may be treated as PRC source income or gains subject to the PRC taxes described above.

If PRC income tax is imposed on gains realized on the transfer of our ordinary shares or ADSs or on dividends paid to our non-resident shareholders or ADS holders, the value of your investment in our ordinary shares or ADSs may be materially and adversely affected. Furthermore, our shareholders or ADS holders whose jurisdictions of residence have tax treaties or arrangements with China may not qualify for benefits under such tax treaties or arrangements.

Value-added tax, or VAT, is imposed to replace the business tax, which could result in unfavorable tax consequences to us.

The Ministry of Finance and the SAT promulgated the Circular on the Inclusion of the Railway Transportation Industry and Postal Service Industry in the Pilot Collection of Value-added Tax to Replace Business Tax, or Circular 106. Pursuant to Circular 106, starting from January 1, 2014, a VAT rate of 6% applies to revenue derived from the provision of express delivery services, and a VAT rate of 11% applies to revenue derived from provision of transportation services, which is higher than the previously applicable 5% and 3% business tax rate. In 2016, the Ministry of Finance and the SAT promulgated the Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax to Replace Business Tax, or Circular 36. Circular 36 took effect as of May 1, 2016 and superseded Circular 106 on the same date. Circular 36 expanded the application of VAT in replacement business tax to enterprises engaging in the building industry, the real estate industry, the financial industry and the life service industry on a nationwide basis. According to Circular 36, the VAT rates applicable to revenue derived from the provision of express delivery services and revenue derived from provision of transportation services remain the same (6% and 11% respectively) as those under Circular 106. Although a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the revenue from services provided, our effective tax rate could be higher. The replacement of the business tax with a VAT on our services could result in unfavorable tax consequences to us. See “Regulation — Regulations on Tax — Value Added Tax.”

We may not be able to obtain certain benefits under relevant tax treaty on dividends paid by our PRC subsidiaries to us through our Hong Kong subsidiaries.

We are an exempted limited liability company, used as holding company, incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC subsidiaries, as paid to us through our Hong Kong subsidiaries, to satisfy part of our liquidity requirements. Pursuant to the PRC

 

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Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, and Circular 81 issued by the State Administration of Taxation, such withholding tax rate may be lowered to 5% if the PRC enterprise is at least 25% held by a Hong Kong enterprise throughout the 12 months prior to distribution of the dividends and is determined by the relevant PRC tax authority to have satisfied other requirements. Furthermore, under the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, which became effective in August 2015, the non-resident enterprises shall determine whether they are qualified for preferential tax treatment under the tax treaties and file relevant reports and materials with the tax authorities. There are also other conditions for benefiting from the reduced withholding tax rate according to other relevant tax rules and regulations. See “Taxation — People’s Republic of China Taxation.” We cannot assure you that our determination regarding our Hong Kong subsidiaries’ qualification to benefit from the preferential tax treatment will not be challenged by the relevant PRC tax authority or that we will be able to complete the necessary filings with the relevant PRC tax authority and benefit from the preferential withholding tax rate of 5% under the Double Taxation Avoidance Arrangement with respect to dividends to be paid by our PRC subsidiaries to our Hong Kong subsidiaries.

We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the SAT in 2009 with retroactive effect from January 1, 2008, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (a) has an effective tax rate less than 12.5% or (b) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the competent tax authority of the PRC resident enterprise this Indirect Transfer.

On February 3, 2015, the SAT issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 supersedes the rules with respect to the Indirect Transfer under SAT Circular 698, but does not touch upon the other provisions of SAT Circular 698, which remain in force. SAT Public Notice 7 has introduced a new tax regime that is significantly different from the previous one under SAT Circular 698 (Article V and Article VI). SAT Public Notice 7 extends its tax jurisdiction to not only Indirect Transfers set forth under SAT Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company (other than by way of sale of equity securities traded on a public market), which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and will the applicable taxes be withheld from payments to the transferor, currently at a rate of 10%. Both the transferor and the PRC entity that directly owns the taxable assets, or the withhold agent, may be subject to penalties under PRC tax laws if the withhold agent fails to withhold the taxes and the transferor fails to pay the taxes.

 

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We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries or investments. Our company may be subject to filing obligations or taxed or subject to withholding obligations in such transactions, under SAT Circular 698 and SAT Public Notice 7. For transfer of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Circular 698 and SAT Public Notice 7. As a result, we may be required to expend valuable resources to comply with SAT Circular 698 and SAT Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

The audit report included in this prospectus has been issued by auditors whose work, in part, is outside the scope of inspection by the PCAOB and, as such, you may be deprived of the benefits of such inspection with respect to such work.

Our independent registered public accounting firm that issues the audit reports included in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. The PCAOB is currently unable to inspect the audit work of our independent registered public accounting firm with respect to our operations in mainland China without the approval of certain Chinese authorities. In May 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or the CSRC, and the Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by PCAOB, the CSRC, or the Ministry of Finance in the United States and the PRC, respectively. PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit US listed Chinese companies.

Inspections of audit firms that the PCAOB has conducted outside mainland China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The PCAOB’s current inability to conduct inspections in mainland China prevents the PCAOB from regularly evaluating our auditor’s audit procedures and quality control procedures as they relate to our operations in mainland China, where our revenues are derived. As a result, investors may be deprived of the benefits of such regular PCAOB inspections and may lose confidence in our reported financial information and the quality of our financial statements.

Proceedings instituted by the SEC against the “big four” PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act against the Chinese affiliates of the “big four” accounting firms (including our auditors). The Rule 102(e) proceedings initiated by the SEC relate to these firms’ inability to produce documents, including audit work papers, in response to the request of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act, as the auditors located in the PRC are not in a position lawfully to produce documents directly to the SEC because of restrictions under PRC law and specific directives issued by the China Securities Regulatory Commission, or the CSRC. The issues raised by the proceedings are not specific to our auditors or to us, but affect equally all audit firms based in China and all China-based businesses with securities listed in the United States.

 

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Risks Related to This Offering and Our American Depositary Shares

An active trading market for our ordinary shares or our ADSs may not develop and the trading price for our ADSs may fluctuate significantly, you may not be able to resell the ADSs at or above the public offering price.

We expect to list our ADSs on the [NASDAQ Global Market/NYSE]. We have no current intention to seek a listing for our ordinary shares on any stock exchange. Prior to the completion of this offering, there has been no public market for our ADSs or our ordinary shares, and we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The initial public offering price for our ADSs will be determined by negotiation between us and the underwriters based upon several factors. We can provide no assurance that the trading price of our ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

The market price for our ADSs may be volatile.

The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other listed internet or other companies based in China that have listed their securities in the United States in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in their trading prices. The trading performances of other Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. Furthermore, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009 and the second half of 2011, which may have a material adverse effect on the market price of our ADSs.

In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due to multiple other factors, including the following:

 

    regulatory developments affecting us, our customers and end marketers, or our industry;

 

    conditions in the online marketing industry;

 

    fluctuation of our results of operations from quarter to quarter due to seasonality in online marketing business, which may be affected by the online spending cycles of consumers and marketers’ practices in marketing budget allocation;

 

    announcements of studies and reports relating to the quality of our solutions and service offerings or those of our competitors;

 

    changes in the economic performance or market valuations of other providers of online marketing solutions;

 

    actual or anticipated fluctuations in our quarterly results of operations and changes in or revisions to our expected results;

 

    changes in financial estimates by securities research analysts;

 

    announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or capital commitments;

 

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    additions to or departures of our senior management;

 

    detrimental negative publicity about us, our management or our industry;

 

    fluctuations of exchange rates between Renminbi and the U.S. dollar;

 

    release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and

 

    sales or perceived potential sales of additional ordinary shares or ADSs.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our ADS price.

We plan to use the net proceeds from this offering primarily for the following purposes: US$                in research and development and big data deep learning capabilities and capacities; US$            in the development and expansion of our suite of solutions and service offerings; and US$             in sales and marketing activities to attract, in particular, more customers to use our solutions on a self-serve basis, and customers from additional industry verticals and geographic markets. We also plan to use US$                in investment, acquisition and business collaboration opportunities that complement or enhance our existing operations and are strategically beneficial to our long-term goals, although we have no present commitments or agreements to enter into any investment, acquisition or business collaboration. We will use the remaining portion of the net proceeds we receive from this offering for general corporate purposes. See “Use of Proceeds.” However, our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve or maintain profitability or increase our ADS price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

Certain existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders.

Our directors and officers will collectively own an aggregate of        % of the total voting power of our outstanding ordinary shares immediately upon completion of this offering, assuming the underwriters do not exercise their over-allotment option. As a result, they have substantial influence over our business, including significant corporate actions such as mergers, consolidations, sales of all or substantially all of our assets, election of directors and other significant corporate actions.

They may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the ADSs. These actions may be taken even if they are opposed by our other shareholders,

 

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including those who purchase ADSs in this offering. In addition, the significant concentration of share ownership may adversely affect the trading price of the ADSs due to investors’ perception that conflicts of interest may exist or arise. For more information regarding our principal shareholders and their affiliated entities, see “Principal Shareholders.”

We have granted, and may continue to grant, share incentives, which may result in increased share based compensation expenses.

We adopted our stock option plan in 2010 for the purpose of granting share based compensation awards to employees, directors and advisors to incentivize their performance and align their interests with ours. We account for compensation costs for all share options using a fair-value based method and recognize expenses in our consolidated statements of comprehensive income in accordance with U.S. GAAP. Under our stock option plan, the maximum aggregate number of ordinary shares which may be issued pursuant to all awards under the plan is 2,398,137. As of the date of this prospectus, options to purchase 1,791,606 ordinary shares have been granted and outstanding. We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share based compensation to them in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who cover us downgrade our ADSs or publish inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.

The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.

Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be                ADSs (representing                ordinary shares) outstanding immediately after this offering, or                ADSs (representing                ordinary shares) if the underwriters exercise their over-allotment option in full.

In connection with this offering, we, our directors and officers and our existing shareholders have agreed not to sell any ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash

 

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dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has discretion as to whether to distribute dividends, subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

The approval of the China Securities Regulatory Commission may be required in connection with this offering under PRC law.

The M&A rules requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and this offering may ultimately require approval from the CSRC. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.

Our PRC counsel, Jingtian & Gongcheng, has advised us based on their understanding of the current PRC law, rules and regulations that the CSRC’s approval is not required for the listing and trading of our ADSs on the [NASDAQ Global Market/NYSE] in the context of this offering, given that:

 

    the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation; and

 

    no provision in this regulation clearly classifies contractual arrangements as a type of transaction subject to its regulation.

However, our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A rules will be interpreted or implemented in the context of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A rules. We cannot assure you that relevant PRC governmental agencies, including the CSRC, would reach the same conclusion as we do. If it is determined that CSRC approval is required for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek CSRC approval for this offering. These sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiaries, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that the settlement and delivery may not occur. In addition, if the

 

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CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of the ADSs.

The post-offering amended and restated memorandum and articles of association that we expect to adopt and to become effective immediately prior to the completion of this offering will contain anti-takeover provisions that could discourage a third party from acquiring us and adversely affect the rights of holders of our ordinary shares and ADSs.

We expect to adopt, subject to the approval by our shareholders, an amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering. The post-offering amended and restated memorandum and articles of association will contain certain provisions that could limit the ability of others to acquire control of our company, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders and ADSs holders of the opportunity to sell their shares or ADSs at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.

As a company incorporated in the Cayman Islands, we will adopt certain home country practices in relation to corporate governance matters that differ significantly from the [NASDAQ corporate governance requirements/NYSE corporate governance listing standards]; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the [NASDAQ corporate governance requirements/NYSE corporate governance listing standards].

As a Cayman Islands company listed on the [NASDAQ Global Market/NYSE], we are subject to the [NASDAQ corporate governance requirements/NYSE corporate governance listing standards]. However, [NASDAQ Global Market/ NYSE] rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the [NASDAQ corporate governance requirements/NYSE corporate governance listing standards]. Upon the completion of this offering, we will follow our home country practices and rely on certain exemptions provided by the [Nasdaq Stock Market Rules]/[Corporate Governance Rules of the New York Stock Exchange] to a foreign private issuer, including exemptions from the requirements to have:

 

    majority of independent directors on our board of directors;

 

    only independent directors being involved in the selection of director nominees and determination of executive officer compensation; and

 

    regularly scheduled executive sessions of independent directors.

As a result of our reliance on the corporate governance exemptions available to foreign private issuers, you will not have the same protection afforded to shareholders of companies that are subject to all of [Nasdaq]/[NYSE]’s corporate governance requirements.

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

We are an exempted limited liability company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2016 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under

 

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Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors will have discretion under the post-offering amended and restated memorandum and articles of association we expect to adopt, to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder resolution or to solicit proxies from other shareholders in connection with a proxy contest.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law (2016 Revision) of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital — Differences in Corporate Law.”

Certain judgments obtained against us, our directors or officers by our shareholders may not be enforceable.

We are an exempted limited liability company incorporated under the laws of the Cayman Islands. We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, a majority of our directors and executive officers reside within China, and most of the assets of these persons are located within China. As a result, it may be difficult or impossible for you to effect service of process within the United States upon these individuals, or to bring an action against us or against these individuals in the United States in the event that you believe your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your ordinary shares.

As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying ordinary shares in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We have agreed to give the depositary at least 30 days’ prior notice of shareholder meetings. Nevertheless, we cannot assure you that you

 

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will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

Except in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests.

Under the deposit agreement for our ADSs, the depositary will give us (or our nominee) a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not give voting instructions to the depositary as to how to vote the ordinary shares underlying your ADSs at any particular shareholders’ meeting, unless:

 

    we have failed to timely provide the depositary with our notice of meeting and related voting materials;

 

    we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

    we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

    a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

    voting at the meeting is made on a show of hands.

The effect of this discretionary proxy is that, if you fail to give voting instructions to the depositary as to how to vote the ordinary shares underlying your ADSs at any particular shareholders’ meeting, you cannot prevent our ordinary shares underlying your ADSs from being voted at that meeting, absent the situations described above, and it may make it more difficult for shareholders to influence our management. Holders of our ordinary shares are not subject to this discretionary proxy.

Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement and the deposit agreement may be amended or terminated without your consent.

Under the deposit agreement, any action or proceeding against or involving the depositary, arising out of or based upon the deposit agreement or the transactions contemplated thereby or by virtue of owning the ADSs may only be instituted in a state or federal court in New York, New York, and you, as a holder of our ADSs, will have irrevocably waived any objection which you may have to the laying of venue of any such proceeding, and irrevocably submitted to the exclusive jurisdiction of such courts in any such action or proceeding. However, the depositary may, in its sole discretion, require that any dispute or difference arising from the relationship created by the deposit agreement be referred to and finally settled by an arbitration conducted under the terms described in the deposit agreement. Also, we may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended. See “Description of American Depositary Shares” for more information.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make such rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a

 

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registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings in the future and may experience dilution in your holdings.

You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.

Because our initial public offering price is substantially higher than our net tangible book value per ordinary share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of US$                per ADS, representing the difference between the assumed initial public offering price of US$                per ADS, the midpoint of the estimated range of the initial public offering price, and our net tangible book value per ADS of US$                as of December 31, 2016, after giving effect to the net proceeds to us from this offering. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of any share options. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon completion of this offering.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

    the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

 

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    the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

 

    the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

    the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the [NASDAQ Global Market/NYSE]. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements. However, such reduced reporting requirements may make our ADSs less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company. We cannot predict if investors will find our ADSs less attractive because we may rely on these exemptions. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and our stock price may be more volatile.

We may lose our foreign private issuer status in the future, which could result in significant additional cost and expense.

The determination of our status as a foreign private issuer is made annually on the last business day of our most recently completed second fiscal quarter. If we were to lose our foreign private issuer status, the regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. We may also be required to modify certain of our policies to comply with corporate governance practices associated with U.S. domestic issuers, which would involve additional costs.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an emerging growth company.

We will incur additional legal, accounting and other expenses as a public reporting company, particularly after we cease to qualify as an emerging growth company, which occurs on the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. For example, we will be required to comply with additional requirements of the rules and regulations of the SEC and requirements of the [NASDAQ Global Market/NYSE], including applicable corporate governance practices. In addition, after we cease to qualify as an emerging growth company, we will be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We also expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

 

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In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may also initiate legal proceedings against us and our business may be adversely affected.

[There can be no assurance that we will not be passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year, which could subject United States investors in our ADSs or ordinary shares to significant adverse United States income tax consequences.

A non-U.S corporation will be a “passive foreign investment company,” or “PFIC,” if, in any particular taxable year, either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the average quarterly value of our assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive income (the “asset test”). Although the law in this regard is unclear, we intend to treat our consolidated variable interest entity as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements. Assuming that we are the owner of our consolidated variable interest entity for United States federal income tax purposes, and based upon our current and expected income and assets, including goodwill, (taking into account the expected proceeds from this offering) and projections as to the value of our ADSs and ordinary shares following the offering, we do not presently expect to be a PFIC for the current taxable year or the foreseeable future.

While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our ADSs or ordinary shares, fluctuations in the market price of our ADSs or ordinary shares may cause us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets, which may be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. If we determine not to deploy significant amounts of cash for active purposes or if it were determined that we do not own the stock of our consolidated variable interest entity for United States federal income tax purposes, our risk of being a PFIC may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

If we are a PFIC in any taxable year, a U.S. holder (as defined in “Taxation — United States Federal Income Tax Considerations”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules and such holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our ADSs or ordinary shares. For more information see “Taxation — United States Federal Income Tax Considerations — Passive Foreign Investment Company Rules.”]

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements that reflect our current expectations and views of future events. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Regulation.” Known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

 

    our goals and strategies;

 

    our future business development, financial condition and results of operations;

 

    the expected growth of online marketing industry, including online marketing technology industry in China;

 

    our expectations regarding demand for and market acceptance of our products and services;

 

    our expectations regarding our customers and end marketers;

 

    our plans to invest in our platform, solutions, data analytics capabilities, technology and technology infrastructure;

 

    our relationships with our content distribution channel partners;

 

    competition in our industry;

 

    general economic and business condition in China and elsewhere; and

 

    relevant government policies and regulations relating to our industry.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should thoroughly read this prospectus and the documents that we refer to herein with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus contains certain data and information that we obtained from various government and private publications including industry data and information from Frost & Sullivan. Data and information in these publications also include projections based on a number of assumptions. China’s online marketing industry, including online marketing technology industry and independent online marketing technology industry, may not grow at the rate projected by market data, or at all. Failure of these industries to grow at the projected rate may have a material and adverse effect on our business and the market price of our ADSs. In addition, the new and rapidly changing nature of China’s online marketing industry, including online marketing technology industry, and independent online marketing technology industry may result in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our industry. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$    million, or approximately US$    million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. These estimates are based upon an assumed initial offering price of US$    per ADS, the midpoint of the range shown on the front cover page of this prospectus. A US$1.00 change in the assumed initial public offering price of US$    per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease the net proceeds of this offering by US$    million, or approximately US$    million if the underwriters exercise their option to purchase additional ADSs in full, assuming the sale of    ADSs at US$    per ADS, the midpoint of the range shown on the front cover page of this prospectus and after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

The primary purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our ADSs, retain talented employees by providing them with equity incentives and enable access to the public equity markets for us and our shareholders. We plan to use the net proceeds of this offering for the following purposes:

 

    US$            in research and development;

 

    US$            in the development and expansion of our suite of solutions and service offerings; and

 

    US$            in sales and marketing.

We plan to use the remaining portion of the net proceeds for general corporate purposes and in investment, acquisition and business collaboration opportunities that complement or enhance our existing operations and are strategically beneficial to our long-term goals, although we have no present commitments or agreements to enter into any investment, acquisition or business collaboration.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. See “Risk Factors — Risks Related to This Offering and Our American Depositary Shares — You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our ADS price.”

In utilizing the proceeds of this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our PRC subsidiaries or make additional capital contributions to our PRC subsidiaries to fund its capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors — Risks Related to Doing Business in China — PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

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DIVIDEND POLICY

We have not previously declared or paid cash dividends and we do not currently plan to declare or pay any dividends in the near future on our shares or ADSs. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. However, we may consider a dividend payout in the future with a payout ratio consistent with the online marketing sector.

We are an exempted limited liability company, used as a holding company incorporated in the Cayman Islands. We rely principally on dividends from our PRC subsidiaries, VIE and its subsidiary for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Risk Factors — Risks Related to Doing Business in China — We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.”

Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws. In addition, our shareholders may, by ordinary resolution, declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table sets forth our capitalization, as of December 31, 2016:

 

    on an actual basis;

 

    on a pro forma basis to reflect the automatic conversion of all our preferred shares into 9,525,757 ordinary shares on a one-for-one basis upon the completion of the offering; and

 

    on a pro forma as adjusted basis to reflect (1) the automatic conversion of all of our outstanding preferred shares into 9,525,757 ordinary shares on a one-for-one basis immediately upon the completion of this offering; and (2) the sale of ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$    per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us assuming no exercise of the underwriters’ option to purchase additional ADSs.

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     December 31, 2016  
     Actual     Pro Forma      Pro Forma
as Adjusted(1)
 
     (US$ in thousands)  

Mezzanine equity:

       

Series A convertible redeemable preferred shares (US$0.001 par value; 2,500,000 shares authorized as of December 31, 2015 and 2016, respectively; 2,476,190 shares issued and outstanding as of December 31, 2015 and 2016, respectively)

     5,597       —       

Series B convertible redeemable preferred shares (US$0.001 par value; 3,000,000 shares authorized as of December 31, 2015 and 2016, respectively; 1,889,249 shares issued and outstanding as of December 31, 2015 and 2016, respectively)

     9,807       —       

Series C convertible redeemable preferred shares (US$0.001 par value; 1,650,000 shares authorized as of December 31, 2015 and 2016, respectively; 1,599,186 shares issued and outstanding as of December 31, 2015 and 2016, respectively)

     10,733       —       

Series D convertible redeemable preferred shares (US$0.001 par value; 4,500,000 shares authorized as of December 31, 2015 and 2016, respectively; 2,493,018 shares issued and outstanding as of December 31, 2015 and 2016, respectively)

     43,956       —       

Series E convertible redeemable preferred shares (US$0.001 par value; 1,200,000 shares authorized as of December 31, 2016; 1,068,114 shares issued and outstanding as of December 31, 2016)

     18,845       —       

Redeemable ordinary shares (US$0.001 par value; 742,320 shares issued and outstanding as of December 31, 2015 and 2016, respectively)

     15,445       —       

Shareholders’ deficit:

       

Ordinary shares (US$0.001 par value; 38,350,000 and 37,150,000 shares authorized as of December 31, 2015 and 2016, respectively; 14,465,124 and 14,970,029 shares issued and outstanding as of December 31, 2015 and 2016, respectively)

     14       24     

Treasury shares (1,293,364 and 788,459 shares as of December 31, 2015 and 2016, respectively)

     (2,468     (2,468)     

 

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     December 31, 2016  
     Actual     Pro Forma     Pro Forma
as Adjusted(1)
 
     (US$ in thousands)  

Additional paid-in capital(2)

     65,687       230,944    

Statutory reserves

     81       81    

Accumulated other comprehensive losses

     (3,241     (3,241  

Accumulated deficit

     (124,385     (124,385  

Total shareholders’ (deficit)/equity

     (64,312     100,955    

Total mezzanine equity and shareholders’ (deficit)/equity

     40,071       100,955    
  

 

 

   

 

 

   

 

 

 

 

(1) The as adjusted information discussed above is illustrative only. Our additional paid-in capital, total shareholders’ deficit and total mezzanine equity and shareholders’ deficit following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.
(2) Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a US$1.00 change in the assumed initial public offering price of US$            per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease each of additional paid-in capital, total shareholders’ deficit and total mezzanine equity and shareholders’ deficit by US$            million.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares and holders of our convertible preferred shares which will automatically convert into our ordinary shares concurrently with the completion of this offering.

Our net tangible book value as of December 31, 2016 was approximately US$25.3 million, or US$1.9 per ordinary share as of that date, and US$    per ADS. Net tangible book value represents the amount of our total consolidated assets, less the amount of our intangible assets and total consolidated liabilities. Pro forma net tangible book value per ordinary share is calculated after giving effect to the automatic conversion of all of our issued and outstanding convertible preferred shares. Pro forma as adjusted net tangible book value per ordinary share is calculated after giving effect to the automatic conversion of all our issued and outstanding convertible preferred shares and the issuance of ordinary shares in the form of ADS by us in this offering. Dilution is determined by subtracting pro forma as adjusted net tangible book value per ordinary share from the public offering price per ordinary share.

Without taking into account any other changes in net tangible book value after December 31, 2016, other than to give effect to (i) the automatic conversion of all of our issued and outstanding convertible preferred shares into 9,525,757 ordinary shares concurrently with the completion of this offering and (ii) the issuance and sale by us of            ordinary shares in the form of ADSs in this offering at an assumed initial public offering price of US$    per ADS (the mid-point of the estimated initial public offering price range shown on the cover page of this prospectus) after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us and assuming the over-allotment option is not exercised, our pro forma as adjusted net tangible book value as of December 31, 2016 would have been US$     million, or US$            per outstanding ordinary share and US$    per ADS. This represents an immediate increase in pro forma net tangible book value of US$    per ordinary share and US$    per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$    per ordinary share and US$    per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Per ordinary
share
     Per ADS  
     US$  

Assumed initial public offering price

     

Actual net tangible book value per ordinary share as of December 31, 2016

     1.9     

Pro forma net tangible book value per ordinary share after giving effect to the automatic conversion of all of our issued and outstanding convertible preferred shares into ordinary shares

     

Pro forma as adjusted net tangible book value per ordinary share after giving effect to (i) the automatic conversion of all of our issued and outstanding convertible preferred shares into ordinary shares and (ii) the issuance of    ordinary shares in the form of ADSs in this offering

     

Dilution in net tangible book value per ordinary share to new investors in the offering

     

A US$1.00 increase (decrease) in the assumed initial public offering price of US$     per ADS (the mid-point of the estimated initial public offering price range shown on the cover page of this prospectus) would increase (decrease) our pro forma net tangible book value after giving effect to the offering by US$    million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to the automatic conversion of our convertible preferred shares and this offering by US$     per ordinary share and US$     per ADS and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by

 

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US$    per ordinary share and US$    per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, on a pro forma basis as adjusted basis as of December 31, 2016, the differences between existing shareholders, including holders of our convertible preferred shares, and new investors with respect to the number of ordinary shares (in the form of ADSs or ordinary shares) purchased from us, the total consideration paid and the average price per ordinary share/ADS paid before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs granted to the underwriters.

 

     Ordinary Shares
Purchased
    Total Consideration     Average Price per
Ordinary Share
     Average Price
per ADS
 
     Number      Percent     Amount      Percent               
     (in thousands of US$, except number of shares and percentages)  

Existing shareholders

               

New investors

               
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

        100.0        100.0     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

A US$1.00 increase (decrease) in the assumed public offering price of US$     per ADS (the mid-point of the estimated initial public offering price range shown on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors by US$    million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

As of the date of this prospectus, there are 1,791,606 ordinary shares issuable upon the exercise of outstanding options to purchase ordinary shares and an additional 337,538 ordinary shares reserved for future issuance under the share option incentive scheme we adopted in 2010, or the 2010 Plan. To the extent that any of the unvested options later vest are exercised to purchase ordinary shares, there will be further dilution to new investors.

Under the 2010 Plan, the maximum number of ordinary shares that may be issued to the beneficiaries is 2,398,137, which have been issued to Arda Holdings Limited, or Arda, as trustee to the beneficiaries of the 2010 Plan. As of the date of this prospectus, options to purchase 2,060,599 ordinary shares were granted under the 2010 Plan, 774,273 of which are not vested, 1,017,333 are fully vested but not exercised, and 268,993 have been exercised. In addition, in December 2016, our board of directors and shareholders authorized the issuance of 1,068,114 ordinary shares to Jian Tang and certain other employees in China upon the fulfillment of certain performance conditions in 2017, and the issuance of 801,086 ordinary shares to Jian Tang and certain other employees in China upon the fulfillment of certain performance conditions in 2018.

 

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EXCHANGE RATE INFORMATION

Our business is primarily conducted in China, and the financial records of our subsidiaries and VIE and VIE’s subsidiary in China are maintained in Renminbi, their functional currency. The financial records of our non-PRC subsidiaries are denominated in their respective currencies, including Hong Kong dollar, Singapore dollars or New Taiwan dollars. However, we use the U.S. dollar as our reporting and functional currency; therefore, periodic reports made to shareholders will include current period amounts translated into U.S. dollars using the then-current exchange rates, for the convenience of the readers. The financial information of our subsidiaries in China is first prepared in Renminbi and then translated into the U.S. dollars, and the financial information of our non-PRC subsidiaries is first prepared in their respective currencies, including Hong Kong dollar, Singapore dollars or New Taiwan dollars, and then translated into the U.S. dollars, both at period-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in shareholders’ equity.

We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. We do not currently engage in currency hedging transactions.

The following table sets forth, for the periods indicated, information concerning exchange rates between the Renminbi and the U.S. dollar based on the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board. These rates are provided solely for your reference and convenience. Unless otherwise stated, all translations of Renminbi into U.S. dollars in this prospectus were made at the rate of RMB6.9430 to US$1.00 and all translations of Hong Kong dollars into U.S. dollars in this prospectus were made at the rate of HK$7.7534 to US$1.00, each being the noon buying rates on December 30, 2016 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We make no representation that the Renminbi referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all. On July 7, 2017, the noon buying rate for Renminbi was RMB6.8039 to US$1.00 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.

 

     Certified Exchange Rate  

Period

   Period-End      Average(1)      High      Low  

2012

     6.2301        6.2990        6.2221        6.3879  

2013

     6.0537        6.1478        6.0537        6.2438  

2014

     6.2046        6.1620        6.0402        6.2591  

2015

     6.4778        6.2827        6.1870        6.4896  

2016

     6.9430        6.6400        6.4480        6.9580  

2017

           

January

     6.8768        6.8907        6.8360        6.9575  

February

     6.8665        6.8694        6.8517        6.8821  

March

     6.8832        6.8940        6.8687        6.9132  

April

     6.8900        6.8876        6.8778        6.8988  

May

     6.8098        6.8843        6.8098        6.9060  

June

     6.7793        6.8066        6.7793        6.8382  

July (through July 7, 2017)

     6.8039        6.8002        6.7984        6.8039  

 

Source: Federal Reserve Statistical Release

(1) Annual averages were calculated by using the average of the exchange rates on the last day of each month during the relevant year. Monthly averages are calculated by using the average of the daily rates during the relevant month.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted limited liability company, such as political and economic stability, an effective judicial system (except for certain disadvantages discussed below), a favorable tax system, the absence of exchange control or currency restrictions and the availability of professional and support services. However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include that the Cayman Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States. Our constituent documents do not contain provisions requiring that disputes be submitted to arbitration, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders.

We conduct substantially all of our current operations outside the United States, and substantially all of our assets are located outside the United States. All of our directors and executive officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon us or such persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed [Law Debenture Corporate Services, Inc.] as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

Travers Thorp Alberga, Attorneys at Law, our counsel as to Cayman Islands law, has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (1) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers, predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (2) entertain original actions brought in the Cayman Islands against us or our directors or officers, predicated upon the securities laws of the United States or any state in the United States.

Travers Thorp Alberga, Attorneys at Law, has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty; and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.

Under the PRC Civil Procedures Law, courts in China may recognize and enforce foreign judgments pursuant to treaties between China and the country where the judgment is rendered or reciprocity arrangements for the recognition and enforcement of foreign judgments. China does not have any treaties or other

 

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arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States or the Cayman Islands. Therefore, Jingtian & Gongcheng, our counsel as to PRC law, has advised us that there is substantial uncertainty as to whether the courts of the PRC would (1) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers, predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (2) entertain original actions brought in the PRC against us or our directors or officers, predicated upon the securities laws of the United States or any state in the United States.

Judgment of United States courts will not be directly enforced in Hong Kong. There are currently no treaties or other arrangements providing for reciprocal enforcement of foreign judgments between Hong Kong and the United States. However, subject to certain conditions, including but not limited to when the judgment is for a liquidated amount in a civil matter and not in respect of taxes, fines, penalties or similar charges, the judgment is final and conclusive and has not been stayed or satisfied in full, the proceedings in which the judgment was obtained were not contrary to natural justice and the enforcement of the judgment is not contrary to public policy of Hong Kong, Hong Kong courts may accept such judgment obtained from a United States court as a debt due under the rules of common law enforcement. However, a separate legal action for debt must be commenced in Hong Kong in order to recover such debt from the judgment debtor.

 

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CORPORATE HISTORY AND STRUCTURE

We commenced our online marketing business in 2009. Two of our subsidiaries, Digital Marketing Group Limited and Tetris Media Limited, existed without significant operational activities prior to 2009. In February 2010, we restructured our holding structuring by incorporating Optimix Media Asia Limited in the Cayman Islands as the holding company of Optimix HK to facilitate financing and offshore listing. In March 2017, we changed our name from Optimix Media Asia Limited to iClick Interactive Asia Group Limited.

In September 2010, we set up Diablo Holdings Corporation, a company incorporated in the British Virgin Islands, which focuses on search engine marketing and operates in China through Search Asia Technology (Shenzhen) Co., Ltd., its wholly owned subsidiary.

In January 2011, we set up our Singapore subsidiary, iClick Interactive (Singapore) Pte. Ltd., to provide localized services to customers in Southeast Asia.

In January 2013, we incorporated Performance Media Group Limited in Hong Kong to further expand our online marketing business.

Also in January 2013, we set up Tetris Media (Shanghai) Co., Ltd., as our wholly owned PRC subsidiary.

In November 2014, we enhanced our data analytics capabilities by acquiring Buzzinate Company Limited, or Buzzinate, a company incorporated in Hong Kong. Buzzinate is an online marketing platform with strong data analytics capabilities and deep understanding of behavior of internet users in China. Buzzinate operates in China through Buzzinate (Shanghai) Information Technology Co., Ltd., its wholly owned subsidiary.

In July 2015, we acquired all shares in OptAim Ltd., or OptAim, and substantially expanded our online marketing business into mobile channels to identify, engage and convert mobile audience. Under the terms of the share purchase agreement, we acquired all equity interests in OptAim Ltd., including those of OptAim Ltd.’s VIE entity, OptAim Network, from its existing shareholders Igomax Inc. (an entity controlled by Jian Tang), Zaffre Investments Inc., Sohu. com Limited, and BAI GmbH, for a total consideration of RMB10 million and US$14,365,345 in cash and 2,535,091 of our ordinary shares. As part of the agreement, Jian Tang and Jie Jiao became the nominee shareholders of OptAim Network. Jian Tang is our co-founder, director, chief operating officer and chief technology officer. Jie Jiao is our chief financial officer. In addition, Optimix Media Asia Limited made two loans in the aggregate amount of US$5.0 million to OptAim, Ltd. to pay a special dividend to Igomax Inc. Igomax Inc., Sohu.com Limited and Jian Tang each agreed to a non-compete and non-solicitation undertaking with respect to OptAim Ltd. and its consolidated subsidiaries for a period of three years. OptAim operates in China through OptAim Beijing, its wholly owned subsidiary. OptAim Beijing has entered into a set of contractual arrangements with OptAim Network, a company incorporated in China, OptAim Network’s nominee shareholders, and Zhiyunzhong, the wholly owned Chinese subsidiary of OptAim Network. See “— Contractual Arrangements with OptAim Network.”

 

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The following diagram illustrates our organizational structure, including our subsidiaries, our VIE, and the VIE’s subsidiary as of the date of this prospectus.

 

LOGO

 

(1) The nominee shareholders of OptAim Network are Jie Jiao and Jian Tang, who hold 51% and 49% equity interests in OptAim Network, respectively. Jie Jiao is our chief financial officer, and Jian Tang is our co-founder, director, chief operating officer and chief technology officer.

We conduct substantially all our operations through the following consolidated subsidiaries:

 

    iClick Interactive Asia Limited: primarily focusing on providing both mobile audience solutions and other solutions to Hong Kong and overseas customers

 

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    Tetris Media Limited and its subsidiary: primarily focusing on providing our other solutions to Hong Kong agency customers and its business are gradually being transferred to iClick Interactive Asia Limited

 

    Performance Media Group Limited: primarily focusing on providing mobile audience solutions and other solutions to Hong Kong customers

 

    China Search (Asia) Limited and its subsidiaries: promoting content distribution opportunities for certain publisher

 

    iClick Interactive (Singapore) Pte. Ltd: primarily focusing on providing both mobile audience solutions and other solutions to Singapore and other overseas customers

 

    iClick Interactive (Beijing) Advertisement Co., Ltd.: primarily focusing on providing our other solutions to PRC customers

 

    OptAim (Beijing) Information Technology Co. Ltd.: primarily focusing on providing mobile audience solutions to PRC customers through our VIE and the VIE’s subsidiary

 

    Beijing OptAim Network Technology Co., Ltd. which is our VIE, and its subsidiary: primarily focusing on providing mobile audience solutions to PRC customers

We are in the process of transferring the business operated by our VIE, OptAim Network, to our wholly owned subsidiaries. We expect that by the end of 2018, OptAim (Beijing) Information Technology Co., Ltd. will replace Beijing OptAim Network Technology Co., Ltd. as contracting party for all our mobile audience solution business that are operated by OptAim. Please refer to “Risk Factors —Risks Related to Our Corporate Structure — We will continue to rely on the contractual arrangements that establish the structure for certain of our operations in China.”

Contractual Arrangements with OptAim Network

Foreign ownership in advertising companies used to be subject to certain restrictions under the PRC laws and regulations. For example, according to the Administrative Provisions on Foreign-Invested Advertising Enterprises, foreign investors were required to meet several conditions in order to invest in the PRC advertising business, such as a minimum number of years of advertising-related experience and an approval from the relevant PRC regulatory authority. OptAim is a Cayman Islands company and OptAim Beijing, its PRC subsidiary, is considered an FIE. To comply with the then-effective PRC laws and regulations, including the Administrative Provisions on Foreign-Invested Advertising Enterprises, OptAim Beijing entered into a set of contractual arrangements with OptAim Network and its shareholders. The laws and regulations that imposed restrictions on foreign ownership in advertising companies, including the Administrative Provisions on Foreign-Invested Advertising Enterprises were abolished in June 2015. We are in the process of transferring the business operated by our VIE, OptAim Network, to our wholly owned subsidiaries. We expect that by the end of 2018, OptAim Beijing will replace OptAim Network as contracting party for all our mobile audience solution business that are operated by OptAim.

There are uncertainties under the PRC laws whether our collection and use of data of multiple kinds and from multiple sources in China to improve the cost-effectiveness of marketing campaigns for customers and marketers in and outside China may be deemed as “foreign-related survey”, which requires a foreign-related survey license from the National Bureau of Statistics in China or its local counterparts. This license may only be granted to a domestic enterprise or a sino-foreign enterprise which meets the several requirements under the relevant PRC laws. In light of these uncertainties and out of prudence, we, through our VIE, OptAim Network, applied for and was granted a foreign-related survey license on June 6, 2017. Therefore, we will continue to rely on OptAim Bejing’s contractual arrangements with OptAim Network and its shareholders to conduct certain of

 

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our operations in China and to the extent these operations are deemed foreign-related survey. See “Risk Factors — Risk Related to Our Corporate Structure — We will continue to rely on the contractual arrangements that establish the structure for certain of our operations in China.”

The contractual arrangements between OptAim Beijing, OptAim Network and the shareholders of OptAim Network allow us to:

 

    exercise effective control over OptAim Network and Zhiyunzhong;

 

    receive substantially all of the economic benefits of OptAim Network and Zhiyunzhong; and

 

    have an exclusive option to purchase all or part of the equity interests and assets in OptAim Network.

As a result of these contractual arrangements, we have effective control over, and are the primary beneficiary of, OptAim Network and therefore treat OptAim Network and its subsidiary as our consolidated affiliated entities under U.S. GAAP and have consolidated their financial results in our consolidated financial statements in accordance with U.S. GAAP.

The following is a summary of the currently effective contractual arrangements by and among OptAim Beijing, our wholly owned subsidiary, OptAim Network, our consolidated VIE, the shareholders of OptAim Network and Zhiyunzhong.

Agreements that Provide us with Effective Control over OptAim Network

Second Amended and Restated Equity Pledge Agreement

OptAim Beijing, OptAim Network and the shareholders of OptAim Network entered into a second amended and restated equity pledge agreement on May 26, 2017. Pursuant to the second amended and restated equity pledge agreement, each shareholder of OptAim Network has pledged all of his or her equity interest in OptAim Network to OptAim Beijing to guarantee the performance by such shareholder and OptAim Network of their respective obligations under the exclusive business cooperation agreement, powers of attorney and the second amended and restated exclusive call option agreement as well as their respective liabilities arising from any breach. If OptAim Network or any of its shareholders breaches any obligations under these agreements, OptAim Beijing, as pledgee, will be entitled to dispose of the pledged equity and have priority to be compensated by the proceeds from the disposal of the pledged equity. Each of the shareholders of OptAim Network agrees that before his or her obligations under the contractual arrangements are discharged, he or she will not dispose of the pledged equity interests, create or allow any encumbrance on the pledged equity interests, or take any action which may result in any change of the pledged equity that may have material adverse effects on the pledgee’s rights under this agreement without the prior written consent of OptAim Beijing. The second amended and restated equity pledge agreement will remain effective until OptAim Network and its shareholders discharge all their obligations under the contractual arrangements and pay out all consulting and services fees under the exclusive business cooperation agreement. We have completed the registration of the equity pledge with the relevant office of the Administration for Industry and Commerce in accordance with PRC Property Rights Law on June 21, 2017.

Powers of Attorney

Through powers of attorney dated May 26, 2017, each shareholder of OptAim Network irrevocably authorizes OptAim Beijing or any person(s) designated by OptAim Beijing to act as his or her attorney-in-fact to exercise all of such shareholder’s voting and other rights associated with the shareholder’s equity interest in OptAim Network, such as the right to appoint directors, supervisors and officers, as well as the right to sell, transfer, pledge and dispose of all or a portion of the shares held by such shareholder. The powers of attorney will remain in force unless OptAim Beijing gives out any instruction in writing otherwise. Once the powers of attorney are terminated in whole or in part, each shareholder shall revoke his/her power of attorney to OptAim Beijing and immediately sign another power of attorney with the person(s) designated by OptAim Beijing.

 

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Spousal Consent

The spouse of Jian Tang signed a spousal consent letter on May 26, 2017. Jian Tang holds 49% equity interest in OptAim Network. Under the spousal consent letter, the signing spouse unconditionally and irrevocably agreed that she was aware of the disposal of OptAim Network shares held by Jian Tang in the abovementioned second amended and restated exclusive call option agreement, the power of attorney, and the second amended and restated equity pledge agreement. The signing spouse confirmed not having any interest in the OptAim Network shares and committed not to impose any adverse assertions upon those shares. The signing spouse further confirmed that her consent and approval are not needed for any amendment or termination of the abovementioned agreements and committed that she shall take all necessary measures needed for the performance of those agreements.

Agreement that Allows Us to Receive Economic Benefits from OptAim Network and Zhiyunzhong

Exclusive Business Cooperation Agreement

OptAim Beijing, OptAim Network and Zhiyunzhong entered into an exclusive business cooperation agreement on January 16, 2015. Pursuant to this agreement, OptAim Beijing or its designated party has the exclusive right to provide OptAim Network and Zhiyunzhong with technical support, consulting services and other services. Without OptAim Beijing’s prior written consent, OptAim Network and Zhiyunzhong shall not accept any technical support and services covered by this agreement from any third party. OptAim Network and Zhiyunzhong agree to pay service fees in an amount equal to 100% of their respective net income for the relevant period on a monthly basis. OptAim Beijing owns the intellectual property rights arising out of the provisions of services under this agreement. OptAim Network and Zhiyunzhong shall grant an irrevocable call option to OptAim Beijing to purchase all or any of their assets or business with the lowest price allowed by PRC law. Unless OptAim Beijing terminates this agreement, this agreement will remain effective until any party thereto is dissolved in accordance with PRC law.

Agreement that Provides Us with the Option to Purchase the Equity Interest in OptAim Network

Second Amended and Restated Exclusive Call Option Agreement

OptAim Beijing, OptAim Network and the shareholders of OptAim Network entered into a second amended and restated exclusive call option agreement on May 26, 2017. Pursuant to the second amended and restated exclusive call option agreement, the shareholders of OptAim Network have irrevocably granted OptAim Beijing or any third party designated by OptAim Beijing a second amended and restated exclusive call option to purchase all or part of their respective equity interests in OptAim Network. Until there is any evaluation request by PRC law, the purchase price is equal to RMB100 or the lowest price allowed by PRC law. Unless otherwise agreed, the shareholders of OptAim Network will immediately gift OptAim Beijing or any third party designated by OptAim Beijing with the purchase price after OptAim Beijing or any third party designated by OptAim Beijing exercises the option. OptAim Beijing may transfer all or part of its option under this agreement to a third party under the approval of the shareholders of OptAim Beijing. Without OptAim Beijing’s prior written consent, the shareholders of OptAim Network shall not, among other things, amend its articles of association, increase or decrease the registered capital, sell, dispose of or set any encumbrance on its assets, business or revenue outside the ordinary course of business, enter into any material contract, merge with any other persons or make any investments, distribute dividends, or enter into any transactions which have material adverse effects on its business. The shareholders of OptAim Network also jointly and severally undertake that they will not sale, transfer, pledge, or otherwise dispose of their equity interests in OptAim Network to any third party or create or allow any encumbrance on their equity interests. This agreement will remain effective until OptAim Beijing or any third party designated by OptAim Beijing has acquired all equity interest of OptAim Network from its shareholders.

 

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In the opinion of Jingtian & Gongcheng, our PRC legal counsel:

 

    the ownership structures of OptAim Beijing and OptAim Network, both currently and immediately after giving effect to this offering, will not result in any violation of applicable PRC laws or regulations currently in effect; and

 

    the contractual arrangements among OptAim Beijing, OptAim Network, the shareholders of OptAim Network and Zhiyunzhong governed by PRC law both currently and immediately after giving effect to this offering are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect.

However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to or otherwise different from the above opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to VIE structures will be adopted or if adopted, what they would provide. If the PRC government finds that the agreements that establish the structure for the operation of OptAim Network do not comply with PRC government restrictions on foreign investment in our businesses, we could be subject to severe penalties including being prohibited from continuing operations. See “Risk Factors — Risks Related to Our Corporate Structure — We will continue to rely on the contractual arrangements that establish the structure for certain of our operations in China,” and “— Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate government and business operations.”

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated statements of comprehensive income/(loss) data and selected consolidated cash flows data for the year ended December 31, 2015 and 2016, and selected consolidated balance sheet data as of December 31, 2015 and 2016 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our audited and unaudited consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate results expected for any future periods. You should read this Selected Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     Year Ended December 31,  
     2015     2016  
     (US$ in thousands, except for
per share and share data)
 

Selected Consolidated Statements of Comprehensive Loss:

    

Net revenues

     65,242       95,357  

Cost of revenues

     (34,531     (61,048
  

 

 

   

 

 

 

Gross profit

     30,711       34,309  
  

 

 

   

 

 

 

Operating expenses:

    

Research and development expenses

     (8,106     (8,584

Sales and marketing expenses

     (31,385     (28,266

General and administrative expenses

     (12,745     (26,767
  

 

 

   

 

 

 

Total operating expenses

     (52,236     (63,617
  

 

 

   

 

 

 

Operating loss

     (21,525     (29,308

Interest expense

     (107     (713

Other gains/(losses), net

     791       (1,082

Fair value (loss)/gain on derivative liabilities

     (19,390     3,995  
  

 

 

   

 

 

 

Loss before income tax expense

     (40,231     (27,108

Income tax benefit/(expenses)

     555       (222

Share of losses from an equity investee

     (38     —    
  

 

 

   

 

 

 

Net loss

     (39,714     (27,330
  

 

 

   

 

 

 

Accretion to convertible redeemable preferred shares redemption value

     (2,692     (773

Accretion to redeemable ordinary shares redemption value

     (1,982     (1,556

Deemed contribution from Series B-1 preferred shareholders

     2,591       —    
  

 

 

   

 

 

 

Net loss attributable to iClick Interactive Asia Group Limited’s ordinary shareholders

     (41,797     (29,659
  

 

 

   

 

 

 

Other comprehensive loss:

    

Foreign currency translation adjustment, net of US$nil tax

     (129     (139
  

 

 

   

 

 

 

Comprehensive loss attributable to iClick Interactive Asia Group Limited

     (39,843     (27,469
  

 

 

   

 

 

 

Net loss per share attributable to iClick Interactive Asia Group Limited

    

Basic

     (3.58)       (2.26)  

Diluted

     (3.58)       (2.26)  

Weighted average number of ordinary shares used in per share calculation

    

Basic

     11,661,049       13,151,063  

Diluted

     11,661,049       13,151,063  
  

 

 

   

 

 

 

 

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The following table presents our selected consolidated balance sheet data as of December 31, 2015 and 2016.

 

     Year Ended December 31,  
     2015     2016  
     (US$ in thousands)  

Selected Consolidated Balance Sheet Data:

    

Current assets:

    

Cash and cash equivalents

     10,395       27,280  

Accounts receivable, net of allowance for doubtful receivables of US$1,733 and US$1,693 as of December 31, 2015 and 2016, respectively

     28,423       30,694  

Rebates receivable

     3,642       2,250  

Prepaid media cost

     24,793       34,409  

Non-current assets:

    

Intangible assets, net

     19,095       14,804  

Goodwill

     48,496       48,496  

Total assets

     146,110       169,640  
  

 

 

   

 

 

 

Liabilities, mezzanine equity and shareholders’ deficit:

    

Current liabilities

     115,124       126,572  

Non-current liabilities

     3,705       2,997  
  

 

 

   

 

 

 

Total liabilities

     118,829       129,569  
  

 

 

   

 

 

 

Total mezzanine equity

     83,210       104,383  

Total shareholders’ deficit

     (55,929     (64,312
  

 

 

   

 

 

 

Total liabilities, mezzanine equity and shareholders’ deficit

     146,110       169,640  
  

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial and Other Data” and our consolidated financial statements and the consolidated financial statements of OptAim and the related notes included elsewhere in this prospectus. The discussion in this section contains forward-looking statements that involve risks and uncertainties. As a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus, our actual future results may be materially different from what we expect.

Overview

We are an integrated cross-channel gateway providing marketers with innovative and cost-effective end-to-end solutions to optimize their online marketing efforts. Our solutions help marketers identify, engage and activate potential customers, monitor and measure the results of online marketing campaigns, and create content catering to audience across different online channels through both PC and mobile devices. We collaborate closely with leading content distribution channels in China, which enables marketers to access a wide variety of cross-channel content distribution opportunities in a single platform to achieve their branding and performance-based marketing goals.

We offer both mobile audience solutions and other solutions based on channels desired by our customers. Our mobile audience solutions are non-search engine marketing solutions designed to identify, engage and activate audience exclusively on mobile apps, and monitor and measure the results of online marketing activities on such channels. Mobile audience solutions have exhibited high growth potential for online marketing in light of the increasing mobile penetration rate and users’ engagement with mobile apps. We have been prioritizing our mobile strategy since 2014, including through our acquisition of OptAim on July 24, 2015, to capture a larger share of online marketing spend on mobile apps. Our gross billing from mobile audience solutions increased significantly by US$71.1 million, or 172.0%, from US$41.3 million in 2015 to US$112.4 million in 2016. OptAim contributed US$41.1 million to our gross billing from July 24, 2015, when we acquired OptAim, to December 31, 2015, and contributed US$105.7 million to our gross billing in 2016. All such gross billing contribution from OptAim related to our mobile audience solutions. Our gross billing from mobile audience solutions represented 47.6% of our total gross billing in 2016, compared to 23.2% in 2015. Our net revenues from mobile audience solutions represented 60.6% of our net revenues in 2016, compared to 18.3% in 2015. In addition to mobile audience solutions, we have other online marketing solutions that are primarily focused on non-mobile app channels and search engine marketing.

We take a flexible approach to the delivery model of our solutions in order to cater to the preferences and levels of internal resources and sophistication of customers. Customers may choose to access our solutions either through (i) a self-service model, under which they have the flexibility to utilize our solutions “a la carte” to complement their existing marketing resources, and (ii) a managed service model, where our account management team provides in-depth services that suit customers’ specific marketing objectives and budgets utilizing our solutions. We seamlessly address marketers’ needs and deliver a highly integrated customer experience throughout their marketing cycle.

Our customers, referring to entities from which we recognize revenue under our marketing campaign contracts with them, include direct marketer customers and marketing agencies. We derived over 70% of our gross billing from direct marketer customers in 2015 and 2016.

We generate revenues primarily from customers’ marketing spend through our platform as they utilize our solutions, and to a lesser extent from rebates from certain publishers. We have achieved significant growth in recent years. Our gross billing grew by 32.5% from US$178.2 million in 2015 to US$236.3 million in 2016. Our net revenues grew by 46.2% from US$65.2 million in 2015 to US$95.4 million in 2016. Our net loss was US$39.7 million and US$27.3 million in 2015 and 2016, respectively.

 

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The Effect of Our Acquisition of OptAim

Since our acquisition of OptAim on July 24, 2015, OptAim has been our wholly owned subsidiary and has been consolidated into our results of operations. Please refer to note 4(b) of our consolidated financial statements included elsewhere in this prospectus. OptAim contributed US$41.1 million to our gross billing and US$11.7 million to our net revenues from July 24, 2015, when we acquired OptAim, to December 31, 2015, and contributed US$105.7 million to our gross billing and US$51.1 million to our net revenues in 2016. Intangible assets identified in connection with our acquisition of OptAim are amortized. Amortization expenses of US$1.8 million and US$4.0 million were recognized under our cost of revenues in 2015 and 2016, respectively. In addition, as of December 31, 2016, we had US$45.5 million of goodwill, which represented approximately 26.8% of our total assets, primarily related to our acquisition of OptAim. Goodwill is recorded at fair value and is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators arise. Impairment charges could substantially affect our results of operations in the periods of such charges. In addition, impairment charges would negatively impact our financial ratios and could limit our ability to obtain financing in the future. See “Risk Factors — Risks Related to Our Business and Industry — We may be required to record significant impairment charges as a result of our acquisition of OptAim.”

As we integrate OptAim’s operations, we have realized synergies and economy of scale. Our operating expenses as a percentage of net revenues decreased from 80.1% in 2015 to 66.7% in 2016. In particular, we were able to reduce our sales and marketing expenses by US$3.1 million, or 9.9%, from US$31.4 million in 2015 to US$28.3 million in 2016 while increasing our net revenues in the same period.

Key Operating and Financial Metrics

We regularly review a number of financial and operating metrics, including those set forth below, to help us evaluate our business, measure our performance, identify trends affecting our business, establish budgets, measure the effectiveness of sales and marketing, and assess our operational efficiencies.

 

     Year Ended December 31,  
     2015     2016  
     (US$ in
thousands)
    (% of gross
billing1)
    (US$ in
thousands)
    (% of gross
billing1)
 

Operating metrics:

        

Gross billing

     178,239       100       236,253       100  

Gross billing from mobile audience solutions

     41,323       23.2       112,403       47.6  

Gross billing from other solutions

     136,916       76.8       123,850       52.4  

Financial metrics:

        

Net revenues

     65,242       36.6       95,357       40.4  

Net revenues from mobile audience solutions

     11,908       28.8       57,761       51.4  

Net revenues from other solutions

     53,334       38.9       37,596       30.4  

Adjusted EBITDA

     (8,850     (5.0     (2,240     (0.9

Adjusted net loss

     (11,583     (6.5     (8,999     (3.8

 

1 With respect to net revenues from mobile audience solutions and net revenues from other solutions, % of gross billing refers to the % of gross billing for mobile audience solutions or % of gross billing for other solutions, as the case may be.

Gross Billing

Gross billing is an important operating measure by which we evaluate and manage our business. We define gross billing as the aggregate dollar amount that our customers pay us, after deducting rebates paid and discounts given to customers.

We use gross billing to assess our business growth, market share and scale of operations, and our ability to generate gross billing is strongly correlated to our ability to generate net revenues. As we have defined gross billing for internal uses, it may not be comparable to similarly titled measures used by other companies in the industry which present the impact of media costs differently.

 

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Gross billing from our mobile audience solutions increased, both in absolute amount and as a percentage of total gross billing, as we prioritized the execution of our mobile strategy to capture a larger share of online marketing spend on mobile apps. This is evidenced by our acquisition of OptAim, which is focused on providing performance-driven mobile audience solutions, in July 2015. OptAim contributed US$41.1 million to our gross billing and US$11.7 million to our net revenues from July 24, 2015, when we acquired OptAim, to December 31, 2015, and contributed US$105.7 million to our gross billing and US$51.1 million to our net revenues in 2016. All such gross billing and net revenues contribution from OptAim related to our mobile audience solutions. Gross billing from our other solutions decreased from 2015 to 2016 as a result of a decrease in the number of customers for our other solutions from 2015 to 2016 as we optimized our customer base to focus on customers that have larger marketing budgets and better credit and liquidity profile, and conduct online marketing campaigns on a more frequent basis.

Our gross billing per customer increased by US$32,020, or 47.5%, from US$67,413 in 2015 to US$99,433 in 2016, while the total number of our customers decreased by 10.1% from 2,644 in 2015 to 2,376 in 2016. This was due to our efforts in optimizing our customer base to focus on sales to customers who have better credit and liquidity profile and larger marketing budgets, and conduct online marketing campaigns on a more frequent basis.

Our gross billing retention rate, referring to the rate with respect to a given fiscal year of (i) gross billing recognized during such period from customers that contributed to the gross billing recognized in the prior fiscal year divided by (ii) gross billing contributed by such customers in such prior fiscal year, was 107% in 2016, compared to 100% in 2015.

Net Revenues

We derive and report our revenue under two models. Our revenue for cost-plus advertisement campaigns and rebates earned from certain website publishers is reported under the net model. Our revenue from performing specified actions (i.e., a CPM, CPC, CPA, CPS, CPL or ROI basis) is reported under the gross model.

Under the net model, we record service fees, net of media costs and, rebates and discounts, as net revenues. Service fees are generally calculated as a percentage of media cost. Such percentage is negotiated on a customer-by-customer, and campaign-by-campaign basis. We also generate revenue under this model from rebates from publishers for which we distribute content distribution opportunities. The amount of such rebates are determined based on a variety of factors, including yearly market spending at these publishers’ platforms.

Under the gross model, we record the aggregate gross dollar amount that our customers spend through our platform, which includes media cost, as net revenues. We charge our customers for specified actions, such as when a user clicks on their marketing messages, or a CPC pricing model, or when their marketing messages are displayed, or a CPM pricing model. Rebates received from publishers are recorded as deduction of cost of revenues under this model.

We grant rebates and discounts to our customers based on certain factors, including their yearly market spending on our platform, to incentivize and encourage them to use our marketing solutions. With respect to the arrangement between a particular publisher and our subsidiary whose sole business is to act as a sales agent for that publisher, rebates and discounts granted to our customers are recorded as cost of revenues as we consider these rebates are identifiable and separable from the rebates revenue generated from that publisher. In all other circumstances, rebates and discounts granted to our customers are recorded as reduction of revenues.

Net revenues as a percentage of gross billing for our mobile audience solutions and other solutions, respectively, represent our share of gross billing under mobile solutions and other solutions, respectively. Net revenues as a percentage of gross billing can be affected by a variety of factors, in particular, the terms of our arrangement with our customers, including whether to conduct their marketing campaigns on a specified-action

 

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(i.e., gross) or cost-plus (i.e., net) basis in a particular period, which in turn depends on customers’ needs and goals. Please refer to “— Key Factors Affecting Our Results of Operations — Our Revenue Models” on the impact of our revenue recognition models on our results of operations.

Net revenues as a percentage of gross billing for mobile audience solutions increased from 28.8% in 2015 to 51.4% in 2016 as more marketing campaigns involving mobile audience solutions were conducted on specified-action (i.e., gross) basis in 2016 compared to 2015. US$54.2 million, or 48.2%, of gross billing from mobile audience solutions were recognized as net revenues on a gross basis in 2016, compared to US$7.9 million, or 19.1%, in 2015. This was a result of the implementation of our go-to-market strategy for mobile audience solutions to capture a larger share of customers’ marketing spend for these solutions.

Net revenues as a percentage of gross billing for our other solutions decreased from 38.9% in 2015 to 30.4% in 2016 as more marketing campaigns involving other solutions were conducted on cost-plus (i.e., net) basis in 2016 compared to 2015. US$17.9 million, or 14.4%, of gross billing from other solutions were recognized as net revenues on a gross basis in 2016, compared to US$30.8 million or 22.5% in 2015.

Non-GAAP Financial Measures

We use adjusted EBITDA and adjusted net loss, each a non-GAAP financial measure, in evaluating our operating results and for financial and operational decision making purposes.

We believe that adjusted EBITDA and adjusted net loss help identify underlying trends in our business that could otherwise be distorted by the effect of the expenses and gains that we include in net loss. We believe that adjusted EBITDA and adjusted net loss provide useful information about our operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

Adjusted EBITDA and adjusted net loss should not be considered in isolation or construed as an alternative to net loss or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to review the historical non-GAAP financial measures to the most directly comparable GAAP measures. Adjusted EBITDA and adjusted net loss presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

Adjusted EBITDA

Adjusted EBITDA represents net loss before (i) depreciation and amortization, (ii) interest expense, (iii) income tax (benefit)/expense, (iv) share-based compensation, (v) fair value loss/(gain) on derivative liabilities, (vi) share of loss from an equity investee, (vii) compensation in relation to the acquisition of OptAim, and (viii) other (gains)/losses, net.

 

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The table below sets forth a reconciliation of our net loss to adjusted EBITDA for the periods indicated:

 

     Year Ended December 31,  
     2015     2016  
     (US$ in thousands)  

Net loss

     (39,714     (27,330

Add / (less):

    

Depreciation and amortization

     3,181       5,824  

Interest expense

     107       713  

Income tax (benefit)/expense

     (555     222  
  

 

 

   

 

 

 

EBITDA

     (36,981     (20,571

Add:

    

Share-based compensation

     6,494       21,244  

Fair value loss/(gain) on derivative liabilities

     19,390       (3,995

Share of loss from an equity investee

     38       —    

Compensation in relation to the acquisition of OptAim

     3,000       —    

Other (gains)/losses, net

     (791     1,082  
  

 

 

   

 

 

 

Adjusted EBITDA

     (8,850     (2,240
  

 

 

   

 

 

 

Adjusted Net Loss

Adjusted net loss represents net loss before (i) share-based compensation, (ii) fair value loss/(gain) on derivative liabilities, (iii) share of loss from an equity investee, (iv) compensation in relation to the acquisition of OptAim, and (v) other (gains)/losses, net.

The table below sets forth a reconciliation of our net loss to adjusted net loss for the periods indicated:

 

     Year Ended December 31,  
     2015     2016  
     (US$ in thousands)  

Net loss

     (39,714     (27,330

Add:

    

Share-based compensation

     6,494       21,244  

Fair value loss/(gain) on derivative liabilities

     19,390       (3,995

Share of loss from an equity investee

     38       —    

Compensation in relation to the acquisition of OptAim

     3,000       —    

Other (gains)/losses, net

     (791     1,082  
  

 

 

   

 

 

 

Adjusted net loss

     (11,583     (8,999
  

 

 

   

 

 

 

Key Factors Affecting Our Results of Operations

We believe the key factors affecting our financial condition and results of operations include the following:

 

    Our ability to expand mobile app channels;

 

    Our revenue models;

 

    Our ability to optimize customer base and increase customer spending;

 

    Our ability to enlarge audience data set, strengthen data analytics capabilities and innovate technologies; and

 

    Seasonality.

 

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Our Ability to Expand Mobile App Channels

Our future growth depends on our ability to expand our content distribution channels, in particular mobile app channels, to capture a larger share of the marketing spend in China. We have been prioritizing the execution of our mobile strategy since 2014 to capture a larger share of marketing spend on mobile apps, including through our acquisition of OptAim on July 24, 2015, which have significantly strengthened our mobile capabilities.

While marketing via non-mobile channels has been established for several years, marketing via mobile channels, in particular via mobile apps, which has a more dynamic competitive landscape, is a relatively new phenomena in China driven by recent innovations in mobile technologies and the growing popularity and prevalence of mobile devices and mobile apps. We have experienced and expect to continue to face significant competition for our mobile audience solutions, which have resulted in a downward pricing pressure on our mobile audience solutions. In addition, in light of the rising demand for marketing via mobile apps, mobile app publishers, especially popular mobile app publishers tend to command stronger bargaining power compared to their non-mobile app publisher counterparts, which has increased media costs for our mobile audience solutions. Therefore, gross profit margins for our mobile audience solutions were significantly lower than those for our other solutions for the same periods historically, and we expect the trend to continue. As a result, an increase in the percentage of revenue from our mobile audience solutions may have a positive impact on our gross billing and net revenues but a negative impact on our gross profit margin.

We do not currently own or control any of our content distribution channels. To further expand our content distribution network, we need to develop new and enhance our existing relationships with content distribution channel partners, which depends, in part, on our ability to continually generate sufficient marketing spend from our customers on these channels, especially mobile app channels. We also intend to strengthen our relationships with content distribution channel partners through technology collaboration to faciliate innovative and effective user engagement.

Our Revenue Models

We derive revenue under two models. Our revenue for cost-plus advertisement campaigns and rebates earned from certain website publishers is reported under the net model. Our revenue from performing specified actions (i.e., a CPM, CPC, CPA, CPS, CPL or ROI basis) is reported under the gross model. Please see “— Key Operating and Financial Metrics — Net Revenues” above for more details. The gross profit margin under our net model is higher than the gross model as cost of revenues under the net model does not include media cost. As a result, an increase in the percentage of gross billing recognized as net revenues under our gross model will have a positive impact on our net revenues and a negative impact on gross profit margin. Our mobile audience solutions, on one hand and other solutions, on the other hand, each represents a mixture of revenue recognized on gross basis and on net basis and the proportion of each fluctuates from period to period. Therefore our net revenues, net revenues as a percentage of gross billing, gross margin and the comparability of our financial results in one period to another may be affected by the relative percentage of gross billing recognized as net revenues under the gross model and net model.

Our Ability to Optimize Customer Base and Increase Customer Spending

Our growth and profitability are dependent upon our ability to optimize customer base and increase customer’s marketing spend on our platform. To optimize our customer base, we conducted a comprehensive review of our customer base in 2016 to focus on sales to customers who have larger marketing budgets and better credit and liquidity profile, and conduct online marketing campaigns on a more frequent basis. We have also been focused, and expect to continue our focus, on sales to direct marketer customers, which tend to command higher gross profit margin compared to agency customers. Furthermore, our growth and profitability also depend on our ability to attract more customers to our self-service model, and to further diversify our customers base to capture the growth in additional industry verticals and geographic markets.

 

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Our ability to increase customer’s marketing spend on our platform depends on whether our solutions can effectively address customers’ evolving and diverse needs in a cost-efficient manner. To that end, we plan to develop and offer more tailored, innovative and user-friendly solutions and services and enhance our sales, marketing and account servicing efforts.

As a result of these initiatives, our gross billing retention rate and gross billing per customer both increased from 2015 to 2016, which resulted in the growth of our overall gross billing despite the decrease in our number of customers during the same period as we optimized our customer base.

Our Ability to Enlarge Audience Data Set, Strengthen Data Analytics Capabilities and Innovate Technologies

Our performance is significantly dependent on our ability to enlarge audience data set, strengthen data analytics capabilities and innovate technologies. This helps customers achieve more precise audience targeting and enables us to retain customers and increase their marketing spend. It also helps drive up our gross profit margin under our gross revenue model as we make better decisions about which content distribution opportunities to bid for and at which price, and better predict user interaction with a marketing message to achieve our customers’ minimum key performance indicator, or KPI requirements without having to purchase additional content distribution opportunities and incur additional media cost. Such KPIs generally include target audience reach (i.e., the percentage of target audience we successfully engage through our platform), click-through rate (i.e., the ratio of users who click on a specific link to the number of total users who view a marketing message) and landing rate (i.e., the ratio of users who arrive at the customers’ websites to the number of total users who view a marketing message). Furthermore, our ability to enlarge audience data set, strengthen data analytics capabilities and innovate technologies enables us to extend our data application across more aspects in online marketing and beyond to capitalize on more growth opportunities.

We plan to continue collaborating with customers and other third parties to increase the dimensions and varieties of our data assets and develop new strategic relationships to exploit new data sources and enlarge audience data set. We also plan to continue investing in our data science technologies and upgrading our technology infrastructure.

Seasonality

We have experienced seasonal fluctuations in revenue. The fourth quarter of each calendar year generally contributes the largest portion of our annual revenue as marketers tend to allocate a significant portion of their online marketing budgets to that quarter, which coincides with Chinese consumers’ increased purchases around the holidays and shopping events in that quarter, such as Single’s Day on November 11 of each year. The first quarter of each calendar year generally contributes the smallest portion of our annual revenue, primarily due to a lower level of allocation of online marketing budgets by marketers at the beginning of the calendar year in which the Chinese New Year holidays fall, during which time businesses in China are generally closed. We expect our revenue to continue fluctuating based on seasonal factors that affect the online marketing industry as a whole.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies

 

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discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on the judgment of our management.

Consolidation of Variable Interest Entities

Foreign ownership in advertising companies used to be subject to certain restrictions under PRC laws and regulations. To comply with the then-effective PRC laws and regulations, OptAim Beijing entered into a set of contractual arrangements with OptAim Network and its shareholders. The contractual arrangements between OptAim Beijing, OptAim Network and the shareholders of OptAim Network allow us to:

 

    exercise effective control over OptAim Network and Zhiyunzhong;

 

    receive substantially all of the economic benefits of OptAim Network and Zhiyunzhong; and

 

    have an exclusive option to purchase all or part of the equity interests and assets in OptAim Network when and to the extent permitted by PRC law.

Our consolidated financial statements include the financial statements of the Company, its subsidiaries, its VIE and the VIE’s subsidiary for which we are the primary beneficiary. All transactions and balances among we, our subsidiaries, our VIE and the VIE’s subsidiary have been eliminated upon consolidation.

A subsidiary is an entity in which we, directly or indirectly, control more than one half of the voting powers; or has the power to appoint or remove the majority of the members of the board of directors; or to cast a majority of votes at the meeting of directors; or has the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

A VIE is an entity in which we, or our subsidiary, through contractual agreements, bears the risks of, and enjoys the rewards normally associated with ownership of the entity. In determining whether we or our subsidiaries are the primary beneficiary, we considered whether it has the power to direct activities that are significant to the VIE’s economic performance, and also our obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. OptAim Beijing, and ultimately we, hold all the variable interests of the VIE and its subsidiary, and has been determined to be the primary beneficiary of the VIE.

In accordance with the contractual agreements among the OptAim Beijing, OptAim Network and the shareholders of OptAim Network, we have power to direct activities of the VIE, and can have assets transferred out of the VIE. Therefore, we consider that there is no asset in the VIE that can be used only to settle obligations of the VIE, except for registered capital and PRC statutory reserves of the VIE and the VIE’s subsidiary amounting to US$2.1 million and US$2.1 million, respectively, as of December 31, 2015 and 2016. As the VIE was incorporated as limited liability company under the PRC Company Law, the creditors do not have recourse to the general credit of the Company for all the liabilities of the VIE. Currently there is no contractual arrangement that could require us to provide additional financial support to the VIE.

As we are conducting our PRC online advertising services business through OptAim Network, we will, if needed, provide such support on a discretion basis in the future, which could expose us to a loss.

We believe that the contractual arrangements among OptAim Beijing, OptAim Network and the shareholders of OptAim Network are in compliance with PRC law and are legally enforceable. However, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements and if the shareholders of VIE were to reduce their interest in us, their interests may diverge from ours and that may potentially increase the risk that they would seek to act contrary to the contractual terms.

Our ability to control the VIE also depends on the power of attorney and OptAim Beijing has to vote on all matters requiring shareholder approval in the VIE. As noted above, we believe this power of attorney is legally enforceable but may not be as effective as direct equity ownership.

 

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Fair Value Determination Related to the Accounting for Business Combinations

We completed business combinations during 2015 which require us to perform purchase price allocations. In order to recognize the fair value of assets acquired and liabilities assumed, mainly consisting of intangible assets and goodwill, we use valuation techniques such as discounted cash flow analysis under the income approach. Major factors considered include historical financial results and assumptions including future growth rates, terminal rate and an estimate of weighted average cost of capital. Most of the valuations of our acquired businesses have been performed by independent valuation specialists under our management’s supervision. We believe that the estimated fair value assigned to the assets acquired and liabilities assumed are based on reasonable assumptions and estimates that market participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates.

Impairment of Goodwill

Impairment of goodwill assessment is performed on at least an annual basis on December 31 or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. According to ASC 350-20-35, an entity may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. We, however, select to proceed directly to perform a two-step goodwill impairment test. The first step compares the fair values of a reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit’s goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in adjusting the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. The judgment in estimating the fair value of a reporting unit includes estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of the fair value of a reporting unit. No goodwill impairment losses were recognized for the years ended December 31, 2015 and 2016.

Revenue Recognition

Our services are the provisions of online marketing services. We utilize a combination of pricing models and revenue is recognized when the related services are delivered based on the specific terms of the contract, which are commonly based on (i) cost-plus, (ii) agreed rebates to be earned from certain website publishers or (iii) specified actions (i.e. CPM, CPC, CPA, CPS, CPL or ROI) and related campaign budgets, depending on the customers’ preferences and their campaigns launched.

We recognize revenue when four basic criteria are met: (1) persuasive evidence of an arrangement with the customer exists reflecting the terms and conditions under which the services will be provided; (2) services have been provided or delivery has occurred; (3) the fee is fixed or determinable; and (4) collection is reasonably assured. Collectability is assessed based on a number of factors, including the creditworthiness of a customer, the size and nature of a customer’s business and transaction history. Amounts collected in excess of revenue recognized are included as deferred revenue. Revenues are recorded net of value-added taxes and surcharges.

Revenue in relation to rebates to be earned from certain website publishers are based on factors determined by these website publishers, such as yearly spending at these website publishers’ various platforms and other factors selected at the discretion of these website publishers. Such rebates earned from website publishers are recorded as revenues when we are acting as an agent in a transaction, and the timing and the amount are based on an evaluation of the terms of each arrangement.

 

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Cost-Plus and Agreed Rebates to be Earned from Certain Website Publishers

For cost-plus advertisement campaigns and rebates to be earned from certain website publishers, sales are valued at the fair value of the amount received. Rebates and discounts granted to clients under cost-plus marketing campaigns, along with free or extended advertising campaigns, are recorded as a deduction from revenue. In the normal course of business, we act as an intermediary in executing transactions with third parties, specifically, we are not the principal in executing these transactions as we are acting on behalf of the website publishers.

The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether we are acting as the principal or an agent in our transactions. In determining whether we act as the principal or an agent, we follow the accounting guidance for principal-agent considerations. The determination of whether we are acting as a principal or an agent in a transaction involves judgment and is based on an evaluation of the terms of each arrangement. While none of the factors individually are considered presumptive or determinative, because we are facilitating the customers and the publishers to purchase and to sell advertising inventory and the pricing is generally restricted by the costs incurred through purchasing the advertising inventory, we conclude that we are not the principal in these arrangements and therefore report revenue earned and costs incurred related to these transaction on a net basis.

Specified Actions

We also generate revenue from performing specified actions (i.e. a CPM, CPC, CPA, CPS, CPL or ROI basis). Revenue is recognized on a CPM or CPC basis as impressions or clicks are delivered while revenue on a CPA, CPS, CPL or ROI basis is recognized once agreed actions are performed. While none of the factors individually are considered presumptive or determinative, because we are the primary obligor and are responsible for (1) identifying and contracting with third-party customers; (2) identifying website publishers to provide website spaces where the Group views the website publishers as suppliers; (3) establishing the selling prices of each of the CPM, CPC, CPA, CPS, CPL or ROI pricing model; (4) performing all billing and collection activities, including retaining credit risk; and (5) bearing sole responsibility for fulfillment of the advertising, the Group acts as the principal of these arrangements and therefore reports revenue earned and costs incurred related to these transactions on a gross basis.

Valuation of Ordinary Shares, Preferred Shares and Share Options

Fair Value of Preferred Shares

In determining fair value of our preferred shares, we, with the assistance of independent appraisers, adopted a two-step method as follows:

Step 1: to derive the fair value of total equity by adopting the discounted cash flow (“DCF”) Method;

Step 2: based on the total equity value derived in step 1, to derive the fair value of each class of shares by adopting equity allocation method.

Significant Factors, Assumptions, and Methodologies Used in Determining Fair Value of Total Equity

We, with the assistance of an independent appraiser, mainly performed retrospective valuations instead of contemporaneous valuations because, at the time of valuation, our financial resources and limited human resources were principally focused on business development efforts. This approach is consistent with the guidance prescribed by the AICPA Audit and Accounting Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid. We, with the assistance of an independent appraiser, evaluated the use of three generally accepted valuation approaches: market, cost and income approaches to estimate our enterprise value. We and our appraisers considered the market and cost approaches as inappropriate for valuing our total equity because no exactly comparable market transaction could be found for the market valuation approach, and the cost approach does not directly incorporate information about the

 

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economic benefits contributed by our business operations. Consequently, we and our appraisers relied solely on the income approach in determining the fair value of our total equity and we adopted market approach in verifying the fair value. This method eliminates the discrepancy in the time value of money by using a discount rate to reflect all business risks including intrinsic and extrinsic uncertainties in relation to our company.

The income approach involves applying discounted cash flow analysis based on our projected cash flows using management’s best estimate as of the valuation dates. Estimating future cash flow requires us to analyze projected revenue growth, gross margins, operating expense levels, effective tax rates, capital expenditures, working capital requirements, and discount rates. Our projected revenues were based on expected annual growth rates derived from a combination of our historical experience and the general trend in our industry. The revenue and cost assumptions we used are consistent with our long-term business plan and market conditions in our industry. We also have to make complex and subjective judgments regarding our unique business risks, our limited operating history, and future prospects at the time of valuation.

The table below sets forth the fair value of total equity as of January 1, 2015, August 1, 2015, December 31, 2015 and December 28, 2016, respectively:

 

     US$ in millions  

January 1, 2015

     325  

August 1, 2015

     485  

December 31, 2015

     478  

December 28, 2016

     441  

The other major assumptions used in calculating the fair value of total equity include:

Weighted average cost of capital, or WACC. Our cash flows were discounted to present value using discount rates that reflect the risks the management perceived as being associated with achieving the forecasts and are based on the estimate of our weighted average cost of capital, or WACC, on the issuance date. The WACCs were determined considering the risk-free rate, industry-average correlated relative volatility coefficient, or beta, equity risk premium, country risk premium, size of our company, scale of our business and our ability in achieving forecast projections. We used WACCs of 15.6%, 16.1%, 16.2% and 18.3% for January 1, 2015, August 1, 2015, December 31, 2015 and December 28, 2016, respectively.

Comparable companies. In deriving the WACCs, which are used as the discount rates under the income approach, four publicly traded companies in the U.S. were selected for reference as our guideline companies.

Discount for lack of marketability, or DLOM. At the time of each issuance, we were a closely-held company and there was no public market for our equity securities. To determine the discount for lack of marketability, we and the independent appraisers used the Black-Scholes put option model. A put option was used because it incorporates certain company-specific factors, including timing of the expected initial public offering and the volatility of the share price of the guideline companies. Based on the analysis, we used DLOM of 12.4%, 9.4%, 20.7% and 19.2% for January 1, 2015, August 1, 2015, December 31, 2015 and December 28, 2016, respectively.

Significant Factors Contributing to the Difference in Fair Value Determined of Total Equity

The determined fair value of total equity increased from US$324.6 million as of January 1, 2015 to US$485.4 million as of August 1, 2015, and decrease to US$478.0 million as of December 31, 2015 and further to US$440.8 million as of December 31, 2016. We believe the change in the fair value of our total equity was primarily attributable to the following factors:

The increase of equity value from January 2015 to August 2015 was mainly attributable to the acquisition of OptAim. Our equity values have remained fairly stable afterward and certain fluctuation is attributable to the changes in discount rate as a result of the change in market data adopted in the CAPM model for derivation of WACC (i.e. increase in risk-free rates and unlevered beta of comparable companies has been observed by end of 2015 and 2016).

 

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Significant Factors, Assumptions, and Methodologies Used in Determining Fair Value of Preferred Shares

Based on the total equity value as determined by step 1, we, with the assistance of independent appraisers, adopted the Equity Allocation Model, which was referenced to the “Practice Aid — Valuation of Privately Held Company Equity Securities Issued as Compensation” issued by the AICPA in 2013, to allocate the equity value of the Company to different class of shares.

We have six classes of shares — ordinary shares, series A preferred shares, series B preferred shares, series C preferred shares, series D preferred shares and series E preferred shares. Under such capital structure, different classes of shareholders have economic or control rights disproportionate to their ownership percentage. As such, the fair value of total equity value is allocated to different classes of shareholders regarding to the economic and control rights associated.

As mentioned in the Amended and Restated Memorandum of Association, total equity value will be allocated to different classes of shareholders under three different scenarios, namely liquidation scenario, redemption scenario and conversion scenario (i.e. the IPO scenario).

Under the liquidation scenario and redemption scenario, we applied the Black-Scholes put option model to allocate the total equity value to these four classes of shares while total equity value is allocated on as-if-fully converted basis under the conversion scenario.

The key assumptions used in the equity allocation model with contingent claim to allocate the total equity value under the liquidation scenario and redemption scenario include:

 

    Current equity value. Current equity value is determined as the total equity value derived by step 1;

 

    Life to expiration. Life to expiration is determined based on the remaining contractual life of each class of preferred shares;

 

    Risk free interest rate. Risk free interest rate is determined based on the yield of U.S. Treasury Strips with a maturity life equal to the expected life to expiration; and

 

    Volatility. volatility is determined based on our comparable companies.

After deriving the values of preferred and ordinary shares under each of the liquidation scenario, redemption scenario and conversion scenario, we then assigned the probabilities of each scenario to arrive at the probability weighted value of each class of shares. The table below sets forth the probability of the three scenarios used in calculating the fair value of the preferred shares as of January 1, 2015, August 1, 2015, December 31, 2015 and December 28, 2016, respectively:

 

     Liquidation
Scenario
    Redemption
Scenario
    Conversion
Scenario
 

January 1, 2015

     12.5     12.5     75.0

August 1, 2015

     10.0     10.0     80.0

December 31, 2015

     10.0     10.0     80.0

December 28, 2016

     5.0     5.0     90.0

 

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The table below sets forth the fair value of ordinary shares and preferred shares as of January 1, 2015, August 1, 2015, December 31, 2015 and December 28, 2016, respectively.

 

     Preferred Shares      Ordinary Shares  
     Series - A      Series - B      Series - C      Series - D      Series - E         
     (US$ in millions)  

January 1, 2015

     35        39        24        48        —          183  

August 1, 2015

     48        51        31        58        —          296  

December 31, 2015

     49        38        32        59        —          305  

December 28, 2016

     44        34        29        49        21        293  

Share-Based Compensation

We grant share options to eligible employees and account for these share-based awards in accordance with ASC 718 Compensation — Stock Compensation.

Share-based awards are measured at the grant date fair value of the awards and recognized as expenses using graded vesting method, net of estimated forfeitures, over the requisite service period, which is the vesting period. Compensation cost is accrued if it is probable that a performance condition will be achieved. We estimate the forfeiture rate based on historical forfeitures of equity awards and adjust the rate to reflect changes in facts and circumstances, if any. We revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates. Grant date fair values of the awards are calculated using the binomial option pricing model with the assistance from an independent appraiser. The binomial option pricing model is used to measure the value of the awards. The determination of the fair value is affected by the share price as well as assumptions regarding a number of complex and subjective variables, including the expected volatility, risk-free interest rates, exercise multiple, expected dividend yield and expected term. The table below sets forth the key assumptions used in the binomial option model:

The binomial option pricing model is used to determine the fair value of the share options granted to employees and non-employees. The fair values of share options granted during the years ended December 31, 2015 and 2016 were estimated using the following assumptions:

 

Grant Date

   Risk-free interest
rate(1)
    Dividend yield(2)     Volatility rate(3)     Expected term (in
years) (4)
 

January 1, 2015

     0.09     0     47.34     NA  

January 1, 2015

     2.37     0     53.47     NA  

February 1, 2015

     1.88     0     54.55     NA  

June 30, 2015

     2.57     0     52.87     NA  

July 6, 2015

     2.53     0     52.60     NA  

July 6, 2015

     2.58     0     52.64     NA  

August 1, 2015

     2.34     0     52.78     NA  

December 31, 2015

     2.52     0     55.54     NA  

April 1, 2016

     2.00     0     49.37     NA  

July 1, 2016

     1.62     0     50.52     NA  

 

(1) The risk-free interest rate of periods within the contractual life of the share option is based on the yield of U.S. Treasury Strips sourced from Bloomberg as of the valuation dates.
(2) The Company has no history or expectation of paying dividends on its ordinary shares.
(3) Expected volatility is estimated based on the average of historical volatilities of the comparable companies in the same industry as at the valuation dates.
(4) The expected term is developed by assuming the share options will be exercised towards the end of maturity dates.

 

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Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. Due to our limited operating history, period-to-period comparisons discussed below may not be meaningful and are not indicative of our future trends. See “Risk Factors — Risks Related to Our Business and Industry — We have experienced rapid growth in recent periods, and such growth rates may not be indicative of our future growth.”

 

     Year Ended December 31,  
     2015     2016  
     (US$ in
thousands)
    (% of net
revenues)
    (US$ in
thousands)
    (% of net
revenues)
 

Net revenues

     65,242       100.0       95,357       100.0  

Cost of revenues

     (34,531     (52.9     (61,048     64.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     30,711       47.1       34,309       36.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Research and development expenses

     (8,106     (12.4     (8,584     (9.0

Sales and marketing expenses

     (31,385     (48.1     (28,266     (29.6

General and administrative expenses

     (12,745     (19.5     (26,767     (28.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (52,236     (80.1     (63,617     (66.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (21,525     (33.0     (29,308     (30.7

Interest expense

     (107     (0.2     (713     (0.7

Other gains/(losses), net

     791       1.2       (1,082     (1.1

Fair value (loss)/gain on derivative liabilities

     (19,390     (29.7     3,995       4.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

     (40,231     (61.7     (27,108     (28.4

Income tax benefit/(expense)

     555       0.9       (222     (0.2

Share of loss from an equity investee

     (38     (0.1     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (39,714     (60.9     (27,330     (28.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Key Components of Results of Operations

Net Revenues

We generate revenue primarily from customers of our online marketing solutions, and from certain publishers for our promotion of their content distribution opportunities. Please refer to “— Key Operating and Financial Metrics — Net Revenues” for a description of the components of our net revenues and revenue recognition policies.

The table below shows our net revenues breakdown for our mobile audience solutions and other solutions for the periods presented.

 

     Year Ended December 31  
     2015      2016  
     (US$ in
thousands)
     (% of net
revenues)
     (US$ in
thousands)
     (% of net
revenues)
 

Net revenues from mobile audience solutions

     11,908        18.3        57,761        60.6  

Net revenues from other solutions

     53,334        81.7        37,596        39.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

     65,242        100        95,357        100  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The table below shows our rebates received from publishers and recognized as net revenues for our mobile audience solutions and other solutions for the periods presented.

 

     Year Ended December 31  
     2015      2016  
     (US$ in
thousands)
     (% net
revenues)
     (US$ in
thousands)
     (% of net
revenues)
 

Rebates received from publishers

     31,528        48.3        29,934        31.4  

Rebates received from publishers for mobile audience solutions

     10,429        16.0        14,665        15.4  

Rebates received from publishers for other solutions

     21,099        32.3        15,269        16.0  

We have a diverse customer base in terms of the geographic location of our customers’ or marketers’ headquarters as we help them, especially multinational marketers, navigate through the fragmented online marketing landscapes in China to identify and reach their potential audience. In determining whether a customer should be classified under a particular geographic region for revenue purposes, we look at the geographic location of our sales office with which such customer executed the marketing campaign contract. In 2015 and 2016, we derived 53.2% and 25.3% of our net revenues from customers outside China, respectively. Our net revenues from customers in China increased significantly from 2015 to 2016 as we continued to prioritize the execution of our mobile strategy. Our net revenues from customers outside China decreased from 2015 to 2016 as we continued to optimize our customer base. The table below shows our net revenues breakdown by geographic region as measured by the location of our sales offices, for the periods presented.

 

     Year Ended December 31,  
     2015      2016  
     (US$ in
thousands)
     (% of net
revenues)
     (US$ in
thousands)
     (% of net
revenues)
 

PRC

     30,505        46.8        71,214        74.7  

Hong Kong

     34,442        52.8        22,766        23.9  

Others

     295        0.4        1,377        1.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

     65,242        100        95,357        100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of Revenues; Gross Profit Margin

Cost of revenues primarily consists of:

 

    Media cost in connection with our gross model. Media cost refers to cost we pay to publishers for acquisition of content distribution opportunities, which is partially offset by rebates we receive from publishers under our gross model. Media cost represented 81.8% and 88.2% of our cost of revenues in 2015 and 2016, respectively.

 

    Rebates to customers in connection with our net model. We pay rebates to our customers in connection with our distribution of advertisements through certain publishers. Rebates to customers represented 9.5% and 4.2% of our cost of revenues in 2015 and 2016, respectively. The significant decrease was mainly due to our increased bargaining power as we solidified our market position as the largest independent online marketing technology platform in China in terms of gross billings.

 

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The table below shows our rebates and discounts granted to customers and recognized as cost of revenues for our mobile audience solutions and other solutions for the periods presented.

 

     Year Ended December 31  
     2015      2016  
     (US$ in
thousands)
     (% cost
of
revenues)
     (US$ in
thousands)
     (% of
cost of
revenues)
 

Rebates and discounts granted to customers

     3,291        9.5        2,568        4.2  

Rebates and discounts granted to customers for mobile audience solutions

     —          —          —          —    

Rebates and discounts granted to customers for other solutions

     3,291        9.5        2,568        4.2  

 

    Amortization of expenses. This relates to amortization of computer software acquired in the acquisitions of Buzzinate and OptAim, which represented 5.4% and 6.8% of our cost of revenues in 2015 and 2016, respectively.

The table below shows the cost of revenues, gross profit and gross profit margin for our mobile audience solutions for the periods presented. Gross profit margin for our mobile audience solutions represents gross profit as a percentage of net revenues for mobile audience solutions.

     Year Ended December 31  
     2015      2016  
     (US$ in
thousands)
     (% net
revenues
for
mobile
audience
solutions)
     (US$ in
thousands)
     (% of net
revenues
for
mobile
audience
solutions)
 

Cost of revenues for mobile audience solutions

     8,511        71.5        48,212        83.5  

Gross profit for mobile audience solutions

     3,396        28.5        9,549        16.5  

The table below shows the cost of revenues, gross profit and gross profit margin for our other solutions for the periods presented. Gross profit margin for our other solutions represents gross profit as a percentage of net revenues for other solutions.

     Year Ended December 31  
     2015      2016  
     (US$ in
thousands)
     (% net
revenues
for other
solutions)
     (US$ in
thousands)
     (% of net
revenues
for other
solutions)
 

Cost of revenues for other solutions

     26,020        48.8        12,836        34.1  

Gross profit for other solutions

     27,314        51.2        24,760        65.9  

Due to competitive landscape and pricing pressure as mobile audience solutions are relatively nascent compared to other solutions, with companies competing for more market share as they enter into this market and as mobile apps publishers tend to have stronger bargaining power compared to other online publishers as a result of the growing popularity of mobile apps, mobile audience solutions tend to command a lower gross profit margin compared to non-mobile marketing solutions. In addition, a larger percentage of gross billing from mobile audience solutions was recognized as net revenues on a gross basis in 2016, which was 48.2%, compared to that for our other solutions in the same period, which was 14.4%. As a result, gross profit margins for our mobile audience solutions in 2015 and 2016, which were 28.5% and 16.5%, respectively, were significantly lower than those for our other solutions, which were 51.2%, and 65.9%, respectively, for the same periods.

 

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Operating Expenses

We classify our operating expenses into three categories: research and development expenses, sales and marketing expenses and general and administrative expenses. The following table sets forth our operating expenses, both in absolute amount and as a percentage of our net revenues, for the periods presented.

 

     Year Ended December 31,  
     2015     2016  
     (US$ in
thousands)
    (% of net
revenues)
    (US$ in
thousands)
    (% of net
revenues)
 

Operating expenses

        

Research and development expenses

     (8,106     (12.4     (8,584     (9.0

Sales and marketing expenses

     (31,385     (48.1     (28,266     (29.6

General and administrative expenses

     (12,745     (19.5     (26,767     (28.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (52,236     (80.1     (63,617     (66.7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

    Sales and marketing expenses. Sales and marketing expenses consist primarily of (i) advertising and market promotion expenses, and (ii) salary and welfare for sales and marketing personnel.

 

    General and administrative expenses. General and administrative expenses consist primarily of (i) salary and welfare for general and administrative personnel, (ii) allowance for doubtful receivables, (iii) professional service fees, and (iv) compensation to certain senior management of OptAim in 2015 in connection with our acquisition. Allowance for doubtful receivables, which related to account receivable from certain agency customers was US$1.7 million and US$0.1 million in 2015 and 2016, respectively. Professional service fees primarily related to legal and audit service in connection with our private placements and OptAim acquisition and preparation for this offering. We expect to continue to invest in our corporate infrastructure and incur expenses related to being a public company, including increased accounting and legal fees, investor relations costs and compliance costs. As a result, we anticipate that general and administrative expenses will continue to increase in future periods.

 

    Research and development expenses. Research and development expenses consist primarily of (i) salary and welfare for research and development personnel, (ii) rental expenses and (iii) depreciation of office premise and (iv) servers utilized by research and development personnel.

Taxation

The Cayman Islands

We and our subsidiary incorporated in the Cayman Islands are not subject to income, corporation or capital gains tax, estate duty, inheritance tax or gift tax. In addition, payment of dividends to our shareholders or the shareholder of our subsidiary in the Cayman Islands are not subject to withholding tax in the Cayman Islands.

The British Virgin Islands

Our subsidiaries incorporated in the British Virgin Islands are not subject to income or capital gains taxes, estate duty, inheritance tax or gift tax. In addition, payment of dividends to the shareholders of our subsidiaries in British Virgin Islands are not subject to withholding tax in the British Virgin Islands.

Hong Kong

Our subsidiaries incorporated in Hong Kong are subject to 16.5% Hong Kong profit tax on their taxable income generated from operations in Hong Kong under the current Hong Kong Inland Revenue Ordinance. Under the Hong Kong tax laws, we are exempted from the Hong Kong income tax on our foreign-derived income. In addition, payments of dividends from our Hong Kong subsidiary to us are not subject to any Hong Kong withholding tax.

 

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PRC

Generally, our PRC subsidiaries, our consolidated VIE and its subsidiary, which are considered PRC resident enterprises under PRC tax law, are subject to enterprise income tax on their worldwide taxable income as determined under PRC tax laws and accounting standards at a rate of 25%.

We are subject to value added tax, or VAT, at a rate of 6% on the services we provide, less any deductible VAT we have already paid or borne. We are also subject to surcharges on VAT payments in accordance with PRC law. VAT has been phased in since August 2013 to replace the business tax that was previously applicable to the services we provide. During the periods presented, we were not subject to business tax on the services we provide.

Dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and receives approval from the relevant tax authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. See “Risk Factors — Risks Related to Doing Business in China — We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.”

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Risk Factors — Risks Related to Doing Business in China — If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Net Revenues

Our net revenues increased by US$30.1 million, or 46.2%, from US$65.2 million in 2015 to US$95.4 million in 2016, primarily as a result of an increase in our net revenues from our mobile audience solutions and partially offset by a decrease in our net revenues from our other solutions.

Net revenues from our mobile audience solutions increased by US$45.9 million, or 385.1% from US$11.9 million in 2015 to US$57.8 million in 2016 as a result of an increase in gross billing from mobile audience solutions and a larger percentage of our gross billing from mobile audience solutions being recognized as net revenues on a gross basis in 2016 compared to 2015. US$54.2 million, or 48.2%, of gross billing from mobile audience solutions was recognized as net revenues on a gross basis in 2016, compared to US$7.9 million, or 19.1%, in 2015. Rebates received from publishers and recognized as net revenues increased by US$4.2 million or 40.6% from US$10.4 million in 2015 to US$14.6 million in 2016 for our mobile audience solutions. OptAim contributed US$51.1 million to our net revenues in 2016, compared to US$11.7 million from July 24, 2015, when we acquired OptAim, to December 31, 2015. All such net revenues contribution from OptAim related to our mobile audience solutions.

Net revenues from our other solutions decreased by US$15.7 million or 29.5% from US$53.3 million in 2015 to US$37.6 million in 2016 primarily as a result of a decrease in gross billing from other solutions and smaller percentage of our gross billing from other solutions being recognized as net revenues on a gross basis in 2016 compared to 2015. US$17.9 million, or 14.4%, of gross billing from other solutions was recognized as net

 

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revenues on a gross basis in 2016, compared to US$30.8 million or 22.5% in 2015. Rebates received from publishers and recognized as net revenues decreased by US$5.8 million or 27.6% from US21.1 million in 2015 to US$15.3 million in 2016 for our other solutions.

Cost of Revenues, Gross Profit and Gross Profit Margin

 

     Year Ended December 31  
     2015     2016  
     (US$ in thousands, except %)  

Cost of revenues

     (34,531     (61,048

Gross profit

     30,711       34,309  

Gross profit margin

     47.1     36.0

Our cost of revenues increased by US$26.5 million, or 76.8%, from US$34.5 million in 2015 to US$61.0 million in 2016, primarily as a result of an increase in media cost, which increased by US$25.8 million, or 88.2%, from US$28.1 million in 2015 to US$53.9 million in 2016, consistent with the growth of our gross billing as we scaled up our business and as a result of a larger percentage of gross billing being recognized as net revenues on a gross basis. 30.4% of our gross billing in 2016 were recognized as net revenues on a gross basis, compared to 21.7% in 2015. Cost of revenues for our mobile audience solutions increased by US$39.7 million, or 466.4%, from US$8.5 million to US$48.2 million, while cost of revenues for our other solutions decreased by US$13.2 million, or 50.7%, from US$26.1 million to US$12.8 million.

The increase in cost of revenues for our mobile audience solutions was in line with the growth of gross billing from mobile audience solutions and also due to an increased percentage of gross billing from mobile audience solutions being recognized as net revenues on a gross basis. US$54.2 million, or 48.2%, of gross billing from mobile audience solutions was recognized as net revenues on a gross basis in 2016, compared to US$7.9 million, or 19.1%, in 2015. OptAim contributed US$47.0 million to our cost of revenues in 2016, compared to US$8.5 million from July 24, 2015, when we acquired OptAim, to December 31, 2015. All such cost of revenues contribution from OptAim related to our mobile audience solutions. No rebate or discount granted to customers was recognized as cost of revenues for our mobile audience solutions in 2015 or 2016.

The decrease in cost of revenues from our other solutions was in line with the decrease of gross billing from other solutions and also due to a decreased percentage of gross billing from other solutions being recognized as net revenues on a gross basis. US$17.9 million, or 14.4%, of gross billing from other solutions was recognized as net revenues on a gross basis in 2016, compared to US$30.8 million or 22.5% in 2015. Rebates and discounts granted to customers and recognized as cost of revenues decreased by US$0.7 million or 22.0% from US$3.3 million in 2015 to US$2.6 million in 2016 for other solutions.

As a result of the above, our gross profit increased slightly from US$30.7 million in 2015 to US$34.3 million in 2016. Specifically, gross profit for our mobile audience solutions increased significantly by US$6.1 million, or 179.4%, from US$3.4 million in 2015 to US$9.5 million in 2016, and gross profit for our other solutions decreased by US$2.5 million, or 9.2% from US$27.3 million in 2015 to US$24.8 million in 2016. Our gross profit margin decreased from 47.1% in 2015 to 36.0% in 2016 primarily due to the expansion in our mobile audience solutions. In addition, a larger percentage of our gross billing in 2016 was recognized as net revenues on a gross basis compared to 2015, which also contributed to an overall lower gross profit margin in 2016 compared to 2015. Gross profit margin for our mobile audience solutions decreased from 28.5% 2015 to 16.5% 2016 as a result of competitive pressure and a larger percentage of gross billing for our mobile audience solutions being recognized as net revenues on a gross basis in 2016 compared to 2015. Gross margin for our other solutions increased from 51.2% 2015 to 65.9% in 2016 as a result of a smaller percentage of gross billing for our other solutions being recognized as net revenues on a gross basis in 2016 compared to 2015.

Due to competitive landscape and pricing pressure as mobile audience solutions are relatively nascent compared to other solutions, with companies competing for more market share as they enter into this market and

 

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as mobile apps publishers tend to have stronger bargaining power compared to other online publishers as a result of the growing popularity of mobile apps, mobile audience solutions tend to command a lower gross profit margin compared to non-mobile marketing solutions. In addition, a larger percentage of gross billing from our mobile audience solution was recognized as net revenues on a gross basis in 2016, which was 48.2%, compared to that for our other solutions in the same period, which was 14.4%. As a result, gross profit margins for our mobile audience solutions in 2015 and 2016 were significantly lower than those for our other solutions for the same periods.

Operating Expenses

Our operating expenses increased by US$11.4 million, or 21.8%, during 2016 compared to 2015, primarily due to increases in general and administrative expenses and research and development expenses, partially offset by a decrease in sales and marketing expenses. Our operating expenses as a percentage of net revenue decreased from 80.1% in 2015 to 66.7% in 2016.

 

    Sales and marketing expenses. Our sales and marketing expenses decreased by US$3.1 million, or 9.9%, from US$31.4 million in 2015 to US$28.3 million in 2016. Sales and marketing expenses as a percentage of net revenues also decreased significantly from 48.1% in 2015 to 29.6% in 2016, as a result of synergies from the integration of complementary sales and marketing capabilities of OptAim and economies of scale, and as we optimized our sales and marketing efforts to focus on sales to customers who have larger marketing budgets and better credit and liquidity profiles.

 

    General and administrative expenses. Our general and administrative expenses increased by US$14.0 million, or 110.0%, from US$12.7 million in 2015 to US$26.8 million in 2016, primarily due to an increase in personnel costs related to share base compensation to one of our founders in 2016, and an increase in headcount for our general and administrative personnel as a result of OptAim acquisition, partially offset by a decrease in legal and professional fees, which primarily related to our acquisition of OptAim in 2015, and the absence of a compensation payment to certain existing shareholders of OptAim in connection with our acquisition of OptAim in 2015. As a result, general and administrative expenses as a percentage of net revenues increased from 19.5% in 2015 to 28.1% in 2016.

 

    Research and development expenses. Our research and development expenses increased by US$0.5 million, or 5.9%, from US$8.1 million in 2015 to US$8.6 million in 2016. Research and development expenses as a percentage of our net revenues decreased from 12.4% in 2015 to 9.0% in 2016, primarily as a result of synergies from the integration of the complementary technologies and technology infrastructure of OptAim and economy of scale.

Interest Expense

Our interest expense increased by 566.4%, or US$0.6 million, from US$0.1 million in 2015 to US$0.7 million in 2016. This increase was primarily due to an increase in the average balance of our outstanding bank borrowings in 2016 compared to 2015.

Other Gains/(Losses), Net

Our other gains, net was US$0.8 million in 2015, compared to an other losses, net of US$1.1 million in 2016. The change was primarily due to an increase by 24.3%, or US$0.2 million, from US$0.9 million in 2015 to US$1.1 million in 2016 in net exchange loss due to the depreciation of Renminbi against the US dollars. In addition, we recorded 1) fair value gain on re-measurement of previously held equity interest in associate of US$1.2 million and 2) management fee income of US$0.4 million in 2015 in relation to our provision of office and human resource service to a third-party to help its expansion in China. We did not incur similar fair value gain and management fee in 2016.

 

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Fair Value (Loss)/Gain on Derivative Liabilities

Our fair value loss on derivative liabilities was US$19.4 million in 2015, compared to a fair value gain on derivative liabilities of US$4.0 million in 2016. The fair value loss or gain on derivative liabilities related to our preferred shares, the conversion and redemption features of which are required to be bifurcated and accounted for as derivative liabilities. The fair value gain on derivative liabilities of US$4.0 million in 2016 was primarily related to our series A, B, D and E preferred shares. The fair value loss on derivative liabilities of US$19.4 million in 2015 was primarily related to our series A, B and D preferred shares, subsequent to which we grew our business substantially as we acquired OptAim.

Share of Losses from an Equity Investee

We incurred US$38 thousand share of losses from an equity investee, Buzzinate, in 2015. We acquired the remaining equity interest in Buzzinate in February 2015 and as a result Buzzinate has become our wholly owned subsidiary and been consolidated in our financial statements since February 2015. We did not have share of losses from an equity investee in 2016.

Income Tax Benefit / (Expenses)

We recorded an income tax benefit of US$0.6 million in 2015 and an income tax expense of US$0.2 million in 2016.

Net Loss

As a result of the foregoing, our net loss decreased by 31.2% from US$39.7 million in 2015 to US$27.3 million in 2016.

Liquidity and Capital Resources

Cash Flows and Working Capital

To date, we have financed our operations primarily through the issuance of shares in private placements and bank financing. As of December 31, 2016, we had US$27.3 million in cash and cash equivalents, and borrowing capacity of US$4.4 million under our revolving credit facilities and term loan facilities of a total principal amount of US$17.3 million. As of December 31, 2016, our cash and cash equivalents primarily consisted of cash on hand, cash held at bank, and time deposits placed with banks or other financial institutions, which have original maturities of three months or less. As of December 31, 2016, we had violated certain financial covenants with respect to our bank borrowings extended by a bank, however, we had obtained the necessary waiver letters such that the bank would not demand immediate repayment. We believe that our current cash and cash equivalents, together with the borrowing capacity under our revolving credit facilities and the term loan facility and anticipated proceeds from this offering will be sufficient to meet our anticipated working capital requirements and capital expenditures for the 12 months following this offering. We may, however, need additional capital in the future to fund our continued operations. If we determine that our cash requirements exceed our available financial resources, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating and financial covenants that might restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

In addition, although we consolidate the results of our consolidated VIE and its subsidiary, we only have access to the assets or earnings of our consolidated VIE and its subsidiary through our contractual arrangements with our consolidated VIE and its shareholders. See “Corporate History and Structure.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “— Holding Company

 

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Structure.” A substantial amount of our future revenues are likely to be denominated in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the SAFE as long as certain routine procedural requirements are fulfilled. However, approval from or registration with competent government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may at its discretion restrict access to foreign currencies for current account transactions or change the foreign exchange control policy in the future. In addition, current PRC regulations permit our PRC subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Our PRC subsidiary is required to set aside at least 10% of its after-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, capital account transactions, which include foreign direct investment and loans, must be approved by and/or registered with the SAFE and its local branches. See “Risk Factors — Risks Relating to Doing Business in China — Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.”

The following table sets forth a summary of our cash flows for the periods indicated:

 

     Year Ended December 31,  
     2015     2016  
     (US$ in thousands)  

Selected Consolidated Cash Flow Data:

  

Net cash used in operating activities

     (9,797     (3,907

Net cash used in investing activities

     (18,095     (3,710

Net cash (used in)/provided by financing activities

     (2,612     24,564  

Effect on exchange rate changes on cash and cash equivalents

     (232     (62

Net (decrease)/increase in cash and cash equivalents

     (30,504     16,947  

Cash and cash equivalents at the beginning of year

     41,131       10,395  

Cash and cash equivalents at the end of year

     10,395       27,280  

Operating Activities

Net cash used in operating activities amounted to US$3.9 million in 2016, which was mainly attributable to a net loss of $27.3 million, partially offset by a net increase in working capital of US$1.3 million and non-cash items of US$22.2 million. The net increase in working capital of US$1.3 million was primarily attributable to a increase in deferred revenue of US$10.8 million, and increase in income tax payable of US$1.9 million and a decrease in rebates receivables of US$1.4 million, partially offset by an increase in prepaid media cost of US$9.6 million and an increase in accounts receivable of US$2.3 million. The increase in deferred revenue of US$10.8 million was primarily driven by an increase in receipt in advance from customers. The increase in prepaid media cost of US$9.6 million was primarily driven by an increase in prepayment to certain publishers to secure rebates.

The non-cash items of US$22.2 million were primarily attributable to share-based compensation of US$21.2 million in relation to our share based payment to one of our founders and certain members of OptAim management team of US$17.6 million and employees of US$3.6 million in 2016, and amortization of intangible assets of US$4.3 million relating to intangible assets, partially offset by fair value gain on derivative financial instruments of US$4.0 million.

Net cash used in operating activities was US$9.8 million in 2015, which was mainly attributable to a net loss of $39.7 million, partially offset by a net increase in working capital of US$1.6 million and non-cash items of US$28.4 million. The net increase in working capital of US$1.6 million was primarily attributable to an

 

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increase in accrued liabilities and other current liabilities of US$9.3 million and a decrease in prepaid media costs of US$8.1 million, partially offset primarily by an increase in accounts receivable of US$13.7 million. The increase in accrued liabilities and other current liabilities of US$9.3 million was primarily driven by an increase in rebate provision to customers and accrued expenses.

The increase in accounts receivable of US$13.7 million was commensurate with the growth of our gross billing. The non-cash items of US$28.4 million were mainly attributable to fair value loss on derivative financial instruments of US$19.4 million, share-based compensation of US$6.5 million and amortization of intangible assets of US$2.0 million.

Investing Activities

Net cash used in investing activities in 2016 was US$3.7 million, due to an increase in restricted cash of US$4.2 million as we incurred more bank borrowings in 2016, and purchase of property and equipment of US$1.0 million, partially offset by a decrease in short-term investments of US$1.6 million.

Net cash used in investing activities in 2015 was US$18.1 million. This primarily consisted of US$14.5 million acquisition cost of subsidiaries, net of cash received related to the payment of cash consideration for our acquisition of OptAim and purchase of property and equipment of US$2.6 million.

Financing Activities

Net cash provided by financing activities in 2016 was US$24.6 million, which was primarily attributable to US$20.0 million of proceeds from issuance of Series E convertible redeemable preferred shares and US$8.2 million of proceeds from bank borrowings, partially offset by repayment of bank borrowings of US$3.8 million and decrease in amounts due to related parties in an amount of US$0.05 million relating to the repayment of a loan provided by our director during the year ended December 31, 2016.

Net cash used in financing activities in 2015 was US$2.6 million. This was primarily attributable to US$15.0 million of remaining proceeds from issuance of Series D convertible redeemable preferred shares, US$7.6 million of proceeds from bank borrowings and US$0.3 million of proceeds from exercise of share options. These were partially offset by the repurchase of ordinary shares in an amount of US$11.6 million, the repurchase of Series B convertible redeemable preferred shares in an amount of US$11.6 million, repayment of bank borrowings in an amount of US$1.6 million and repayment of a loan provided by our director in an amount of US$0.6 million.

Capital Expenditures

We made capital expenditures of US$2.7 million and US$0.9 million in 2015 and 2016, respectively. In these periods, our capital expenditures were mainly used for the purchase of property and equipment and purchase of software. Our capital expenditures for 2017 are expected to be approximately US$3.0 million, consisting primarily of expenditures related to the purchase of property and equipment and purchase of software. We will continue to make capital expenditures to meet the expected growth of our business.

Contractual Obligations and Commercial Commitments

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2015 and 2016:

 

     Payment Due by Period  
     Total      Less than 1 year      1-3 years      3-5 years      More than 5 years  
     (US$ in thousands)  

Operating lease obligations

     3,500        2,065        1,435        —          —    

Debt obligation, including interest

     13,555        13,471        84        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     17,055        15,536        1,519        —          —    

 

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Our operating lease obligations relate to our leases of office premises. We lease our office premises under a non-cancelable operating lease arrangement. Rental expenses under operating leases for 2015 and 2016 were US$2.6 million and US$3.0 million, respectively.

Credit Facilities

In December 2015, we entered into a facility agreement for working capital loans with SPD Silicon Valley Bank, which was most recently amended in March 2017. Pursuant to the agreement as amended, we were granted a one-year revolving line of credit up to the lesser of (a) RMB50 million (US$7.2 million) and (b) a borrowing base equal to 70% of eligible accounts receivable (as defined in the agreement). The agreement as amended provides for customary representations, warranties, affirmative and negative covenants and events of default. The agreement as amended also includes a financial covenant that requires that we meet certain minimum monthly adjusted quick ratio, minimum quarterly EBITDA, minimum month-end unrestricted cash balance and new equity round. We provided corporate guarantee and a maximum amount of RMB60 million (US$8.6 million) account receivables as pledge to secure our obligation to SPD Silicon Valley Bank. The interest rate of this facility is the benchmark interest rate determined by the People’s Bank of China for loans over one year granted by financial institutions plus 1.65% per annum. We are required to make monthly interest payments through December 2018, when the loan matures and the principal is due and payable. We are allowed to voluntarily prepay the loan without prepayment charges. As of December 31, 2016, the total outstanding amount of the revolving loan was RMB30 million (US$4.3 million) and RMB20 million (US$2.9 million) was available to be drawn under this facility.

In December 2015, we entered into a facility agreement for working capital loans with SPD Silicon Valley Bank, which was most recently amended in March 2017. Pursuant to the agreement as amended, we were provided with a US$2 million term loan and a revolving line of credit up to the lesser of (a) US$3 million and (b) a borrowing base equal to 80% of eligible accounts receivable (as defined in the agreement). The agreement as amended provides for customary representations, warranties, affirmative and negative covenants and events of default. The agreement as amended also includes a financial covenant that requires that we meet certain minimum monthly adjusted quick ratio, minimum quarterly EBITDA and minimum month-end unrestricted cash balance. We provided corporate guarantee and debentures constituting a floating charge over all assets of certain of our subsidiaries to secure our obligation to SPD Silicon Valley Bank. The interest rate for the term loan facility is the benchmark interest rate determined by three-month LIBOR plus 7.00% per annum, and we are required to make equal monthly payments of principal plus accrued interest through January 2018. We will be charged a prepayment fee if we prepay the term loan before the maturity date. As of December 31, 2016, the total outstanding amount of the term loan was approximately US$1.1 million and no further amounts were available to be drawn under this facility. The interest rate of the revolving loan is the benchmark interest rate determined by three-month LIBOR plus 5.75% per annum, and we are required to make monthly interest payments through December 2017, when the loan matures and the principal is due and payable. We are allowed to voluntarily prepay the revolving loan without prepayment charges. As of December 31, 2016, the total outstanding amount under the revolving loan was US$2,950,000 and US$50,000 was available to be drawn under this facility. This loan also contains certain repayable on demand clause.

In May 2016, we entered into a facility agreement for working capital loans with Bangkok Bank, which was most recently amended in October 2016. Pursuant to the agreement as amended, we were provided with a RMB20 million (US$2.9 million) revolving line of credit. The agreement as amended provides for customary representations, warranties, affirmative and negative covenants and events of default. The agreement as amended does not include a financial covenant. Our obligations to Bangkok Bank are secured by a pledged deposit in US dollar equals to 105% of our total outstanding amount under this facility. The interest rate of this facility was the benchmark interest rate determined by the People’s Bank of China for loans over six months granted by financial institutions plus 20.0% per annum. We are required to make monthly interest payments through May 2017, when the loan matures and the principal is due and payable. We will be charged a prepayment fee if we prepay the loan before the maturity date. As of December 31, 2016, the total outstanding amount of the revolving loan was RMB10 million (US$1.4 million) which was repaid in January 2017.

 

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In July 2016, we entered into a facility agreement for working capital loans with SPD Silicon Valley Bank, which provides for a RMB12 million (US$1.6 million) one-year non-revolving loan. The agreement contains customary representations, warranties, affirmative and negative covenants and events of default. The agreement also includes a financial covenant that requires that we meet certain foreign debt quota coverage. Our obligations to Silicon Valley Bank are secured by a pledged deposit with an amount of US$2 million. The interest rate of this facility is the benchmark interest rate determined by the People’s Bank of China for loans over one year granted by financial institutions plus 0.435% per annum, and we are required to make monthly interest payments through July, 2017, when the loan matures and the principal is due and payable. We are allowed to voluntarily prepay the loan without prepayment charges. As of December 31, 2016, the total outstanding amount of the non-revolving loan was RMB12 million (US$1.7 million) and no further amounts were available to be drawn under that facility.

In November 2016, we entered into a facility agreement for working capital loans with SPD Silicon Valley Bank, which provides for a RMB10 million (US$1.4 million) three-month non-revolving loan. The agreement includes a financial covenant that requires that we meet certain foreign debt quota coverage. Our obligations to Silicon Valley Bank are secured by a pledged deposit with an amount of US$1,666,000. The interest rate of this loan facility is the benchmark interest rate determined by the People’s Bank of China for loans over three months granted by financial institutions plus 0.435% per annum, and we are required to make monthly payment of accrued interest through February 2017, when the loan matures and principal is due and payable. We are allowed to voluntarily prepay the loan without prepayment charges. As of December 31, 2016, the total outstanding amount of the non-revolving loan was RMB10 million (US$1.4 million) and no further amounts were available to be drawn under that facility. The facility was fully repaid in February 2017.

Other than those shown above, we did not have any significant capital and other commitments, long-term obligations, or guarantees as of December 31, 2016.

Off-balance Sheet Commitments and Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or product development services with us.

Internal Control over Financial Reporting

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal control and procedures over financial reporting. In the course of auditing our consolidated financial statements for the years ended December 31, 2015 and 2016, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting, as well as other control deficiencies. As defined in the standards established by the PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis.

These two material weaknesses identified relate to (1) the lack of sufficient accounting personnel with appropriate understanding of U.S. GAAP and SEC reporting requirements, and (2) the lack of a comprehensive accounting policies and procedures manual to facilitate preparation of U.S. GAAP financial statements, which inhibits our subsidiaries’ ability to prepare consolidation from local books based on PRC GAAP and Hong Kong Financial Reporting Standards to their U.S. GAAP basis information for group financial reporting and imposes a risk that adjustments to U.S. GAPP are not identified in a timely manner. Neither we nor our independent

 

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registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act for purposes of identifying and reporting any weakness in our internal control over financial reporting. We and they are required to do so only after we become a public company. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified.

To remedy our identified material weaknesses, we have adopted a few measures to improve our internal control over financial reporting, including. In particular, we are in the process of hiring additional accounting staff with an appropriate understanding of U.S. GAAP and SEC reporting requirements. We also plan to establish a comprehensive accounting policies and procedures manual and provide internal training to accounting and operation staff in relation to these policies and procedures.

We cannot assure you that we will remediate our material weaknesses in a timely manner. See “Risk Factors — Risks Related to Our Business — If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.”

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an emerging growth company pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Holding Company Structure

iClick Interactive Asia Group Limited is a Cayman Islands exempted limited liability company, used as a holding company with no material operations of its own. We conduct our operations primarily through our wholly owned subsidiaries, our consolidated VIE and its subsidiary in China. As a result, our ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our PRC subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly owned subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our wholly owned PRC subsidiaries and consolidated affiliated entities is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by the SAFE. We currently plan to reinvest all earnings from our PRC subsidiaries to their business developments and do not plan to request dividend distributions from them.

Inflation

Since our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent increases in the consumer price index for December 2015 and 2016 were 1.6% and 1.9%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.

 

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Quantitative and Qualitative Disclosures about Market Risk

Foreign Exchange Risk

Foreign currency risk arises from future commercial transactions and recognized assets and liabilities. A significant portion of our revenue-generating transactions and expense-related transactions are denominated in Renminbi, which is the functional currency of our subsidiaries, VIE and its subsidiaries in China. Our commercial transactions outside China are primarily denominated in U.S. dollars and Hong Kong dollars, which are pegged to U.S. dollars. We do not hedge against currency risk.

The value of Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again, and it has appreciated more than 10% since June 2010. On August 11, 2015, the PBOC announced plans to improve the central parity rate of the RMB against the U.S. dollar by authorizing market-makers to provide parity to the China Foreign Exchange Trading Center operated by the PBOC with reference to the interbank foreign exchange market closing rate of the previous day, the supply and demand for foreign currencies as well as changes in exchange rates of major international currencies. Effective from October 1, 2016, the International Monetary Fund added Renminbi to its Special Drawing Rights currency basket. Such change and additional future changes may increase the volatility in the trading value of the Renminbi against foreign currencies. The PRC government may adopt further reforms of its exchange rate system, including making the Renminbi freely convertible in the future. Accordingly, it is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.

To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of Renminbi against the U.S. dollar would reduce the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, servicing our outstanding debts, or for other business purposes, appreciation of the U.S. dollar against the Renminbi would reduce the U.S. dollar amounts available to us.

As of December 31, 2016, we had Renminbi-denominated cash and cash equivalents, accounts receivable, prepaid cost and deferred revenue of RMB67.7 million, RMB159.0 million, RMB238.4 million and RMB167.9 million, respectively. We estimate that a 10% depreciation of Renminbi against the U.S. dollar based on the foreign exchange rate on December 31, 2016 would result in our holding U.S. dollar equivalents of US$(0.9) million, US$(2.1) million, US$(3.1) million and US$2.2 million for cash and cash equivalents, accounts receivable, prepaid cost and deferred revenue, respectively. In addition, we estimate that a 10% depreciation of Renminbi against the U.S. dollar based on the foreign exchange rate on December 31, 2015 would result in a decrease of US$3.1 million and US$1.9 million in our net revenues and cost of revenues in 2015, respectively, and a 10% depreciation of Renminbi against the U.S. dollar based on the foreign exchange rate on December 31, 2016 would result in a decrease of US$6.7 million and US$5.3 million change in our net revenues and cost of revenues in 2016, respectively.

Certain of our operating activities are transacted in HK dollars. We consider the foreign exchange risk in relation to transactions denominated in HK dollars with respect to U.S. dollars is not significant as HK dollar is pegged to U.S. dollar.

Interest Rate Risk

Our main interest rate exposure relates to bank borrowings. We also have interest-bearing assets, including cash and cash equivalents, short-term investments and restricted cash. We manage our interest rate exposure with

 

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a focus on reducing our overall cost of debt and exposure to changes in interest rates. All of the aggregate principal outstanding amount of our bank borrowings as of December 31, 2016 was at floating rates.

As of December 31, 2016, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming the amount of bank borrowings outstanding at the end of the year was outstanding for the entire year, our net loss would have been US$129,818 higher/lower, respectively, mainly as a result of higher/lower interest expense for our bank borrowings at floating rates.

Impact of Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014 -09 will eliminate transaction-specific and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenues based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenues and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, which defers by one year ASU 2014-09’s effective date. The amendment will be effective for annual reporting periods beginning after December 15, 2017 including interim periods within that reporting period. Early adoption is permitted only for annual and interim periods beginning after December 15, 2016.

In March 2016, the FASB issued ASU 2016-08, which amends the principal-versus-agent implementation guidance and illustrations in the Board’s new revenue standard (ASC 606). The amendments in this update clarify the implementation guidance on principal versus agent considerations. When another party, along with the reporting entity, is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide that good or service to the customer (as a principal) or to arrange for the good or service to be provided to the customer by the other party (as an agent). The guidance is effective for interim and annual periods beginning after December 15, 2017.

We will apply the new revenue standard beginning January 1, 2018 and will not early adopt. We will set up an implementation team to analyze each revenue stream in accordance with the new revenue standard to determine the impact on our consolidated financial statements. We plan to continue the evaluation, analysis and documentation of its adoption of ASU 2014-9 (including those subsequently issued updates that clarify its provisions) throughout 2017 as we work towards the implementation and finalizes our determination of the impact that the adoption will have on our consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The ASU simplifies consolidation accounting by reducing the number of consolidation models from four to two. In addition, the new standard simplifies the FASB Accounting Standards Codification and improves current guidance by: (i) placing more emphasis on risk of loss when determining a controlling financial interest; (ii) reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a VIE; and (iii) changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs.

The ASU will be effective for periods beginning after December 15, 2016, for public companies. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are in the process of evaluating the impact of the standard on our consolidated financial statements.

 

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In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. The new guidance requires entities to present all deferred tax assets and liabilities, along with any related valuation allowance, as non-current on the balance sheet. The guidance is effective for publicly-traded companies for interim and annual periods beginning after December 15, 2016 (early adoption is permitted). We do not expect this standard to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02: Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous U.S. GAAP, which did not require lease assets and lease liabilities to be recognized for most leases.

For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of evaluating the impact of the standard on our consolidated financial statements.

On August 6, 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows — Classification of Certain Cash Receipts and Payments.” The ASU provides guidance on the classification of certain cash receipts and payments including debt prepayment or debt issuance costs and cash payments for contingent considerations. The ASU also provides clarification on the application of the predominance principle outlined in ASC 230. The effective date for public entities will be annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of this standard will have on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). This standard will require entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time of transfer. This standard requires a modified retrospective approach to adoption. ASU 2016-16 is effective for fiscal years and interim periods within those years beginning after December 31, 2018. We do not expect ASU 2016-16 to have a material impact to our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which revises the definition of a business. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. To be a business without outputs, there will now need to be an organized workforce. ASU 2017-01 is effective for fiscal years and interim periods within those years beginning after December 15, 2018. We currently do not expect ASU 2017-01 to have a material impact to our consolidated financial statements, but will apply the guidance upon adoption to business acquisitions, disposals and segment changes, if any.

In March, 2016, the FASB issued ASU 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows; (d) accounting for forfeitures of share-based payments. The ASU will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We do not expect this standard to have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which requires entities to include restricted cash and restricted cash equivalents in the cash and cash equivalent balances in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of the adoption on our consolidated financial statements.

 

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In January 2017, the FASB issued ASU 2017-04, “Intangibles — Goodwill and Other (Topic 350): simplifying the test for goodwill impairment”, the guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not the difference between the fair value and carrying amount of goodwill which was the step 2 test before. The ASU should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.

 

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INDUSTRY

All the information and data presented in this section have been derived from Frost & Sullivan’s industry report dated June, 2017 entitled “China Online Marketing Market Independent Market Research”, unless otherwise noted. Frost & Sullivan has advised us that the statistical and graphical information contained herein is drawn from its database and other sources. The following discussion includes projections for future growth, which may not occur at the rates that are projected or at all.

China’s Online Marketing Market

Benefiting from its rapid economic growth and increasing domestic consumption in the past decades, China has the world’s second largest marketing industry with a market size of RMB924.3 billion in 2016, as measured by total marketing spend, growing from RMB697.2 billion in 2012 with a CAGR of 7.3%. It is expected to reach RMB1,371.4 billion in 2021, representing a CAGR of 8.2% from 2016 to 2021.

Driven by continuous innovations in internet and mobile technologies and the increasing amount of time consumers spend on digital devices as well as the data-driven potential of online marketing, marketers are increasingly shifting their marketing spend from offline channels, such as television advertising, print advertising and radio advertising, to online channels in order to achieve wider but more targeted audience reach and provide more tailored marketing messages in a cost effective manner. Online marketing in China, as measured by total marketing spend, grew from RMB152.6 billion in 2012 to RMB343.4 billion in 2016, representing a CAGR of 22.5%, which outpaced the growth of the overall marketing market. Online marketing spend in China is expected to reach RMB767.1 billion in 2021, representing a CAGR of 17.4% from 2016 to 2021. In 2016, online marketing spend accounted for approximately 37.2% of total marketing spend in China, surging from 21.9% in 2012. This percentage is expected to continue to increase in the coming years, reaching approximately 52.3% in 2020, when online marketing surpasses offline marketing as the primary segment in China’s marketing industry.

Mobile marketing is gaining increasing popularity in China, which is a major driver of growth of the online marketing market.

 

    The mobile online marketing market size surged from RMB58.6 billion in 2012 to RMB216.9 billion in 2016, representing a CAGR of 38.7%. The mobile online marketing market replaced the dominant role of PC online marketing in 2015 and it is expected to maintain its upswing and reach RMB689.3 billion by 2021, representing a CAGR of 26.0% from 2016 to 2021.

 

    The number of mobile internet users in China is expected to grow from 695 million in 2016 to 876 million in 2021, and the penetration of mobile internet users as a percentage of total internet users in China is expected to grow from 95.1% in 2016 to 97.0% in 2021. Driven by high-speed networks and the growing variety of smartphones, tablets and mobile applications, the average weekly time spent on the internet through mobile devices per capita in China has increased significantly at a CAGR of 21.0% from 2012 to 2016, and is expected to grow from 19.1 hours in 2016 to 37.9 hours in 2021, representing a CAGR of 14.7%.

 

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The diagram below illustrates the historical and projected breakdown of the online marketing market in China by online and offline segments for each of the periods presented.

Online Marketing Market Size Breakdown by Device (China), 2012-2021E

 

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Online marketing is divided into the following four segments:

 

    Create: the creation, personalization curation and management of marketing content to be delivered to targeted audience;

 

    Connect: the delivery of marketing content to targeted audience through marketing channels and forms;

 

    Manage: the planning and management strategies to accomplish marketing objectives utilizing available resources; and

 

    Measure: the gathering of valuable audience insights through monitoring and analyzing campaign performance and other data traffic.

The key trends shaping China’s online marketing market include:

 

    Integration of media resources. Marketers tend to promote their products and services through the most efficient channels. Companies that provide one-stop platforms to help marketers deliver marketing content and monitor its effectiveness across a wider spectrum of marketing channels in an cost-efficient manner are expected to benefit from this trend.

 

    Enrichment, diversification and personalization of marketing content. Content marketing is a strategic marketing approach focusing on creating and distributing valuable, relevant and consistent content to attract and retain targeted audience and ultimately drive consumption. The ability to enrich, diversify and personalize marketing content will be one of the most critical factors for online marketing companies to succeed.

 

    Rise of mobile marketing. Mobile marketing market has demonstrated tremendous growth potential with significant advantages in terms of accessibility and portability. In light of the growing mobile audience base and continuous innovation in mobile technology, companies that can help marketers better create, connect, manage and measure their marketing through mobile channels are poised to capture greater market share.

 

    Development of advanced online marketing technologies. Advanced technologies have proven to boost the efficiency and capability of market content delivery, and to increase the reach of audience group. It also enables marketers to collect, monitor and analyze information and explore valuable insights, which in turn help them develop and implement targeted market strategies. As a result, companies that focus on technology innovations to online marketing to efficiently execute marketing campaigns are expected to capitalize on this trend.

 

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    Rising significance of audience data management. Audience data management can help marketers gather valuable insights to evaluate the performance of their marketing campaigns and plan future marketing strategies. Companies that are able to apply technologies such as big data and cloud computing to extract most value out of audience data to increase effectiveness and efficiency of marketing objectives for marketers are expected to benefit from this trend.

China’s Online Marketing Technology Market

Technologies have been increasingly utilized in online marketing in China in recent years. They help marketers optimize marketing resources and create and deliver tailored marketing content to a wide range of audience effectively and efficiently. They also provide instrumental data insights and feedback on audience engagement. The total size of China’s online marketing technology market, as measured by gross billing, was RMB129.1 billion in 2016, growing from RMB53.7 billion 2012, representing a CAGR of 24.5%, and is expected to further increase to RMB302.3 billion in 2021, representing a CAGR of 18.5% from 2016 to 2021.

China’s online marketing technology market experienced rapid growth in the past years. In the United States, marketers are accustomed to having larger marketing departments well versed in online marketing, including using marketing technologies through self-service model. In China, marketers expect a higher level of customer service support when using marketing technologies or more simplified marketing technology solutions that would enable them to execute marketing campaigns on their own.

Online marketing technology market can be divided into the same four segments as the online marketing industry, as each segment of the online marketing industry is served by marketing technologies of different functionalities:

 

    Create: technologies that assist marketers in designing marketing content, and include content creation tools, graphic creation tools, webinar and event creation tools.

 

    Connect: technologies that assist marketers in the delivery of marketing content to targeted audience, and include mobile apps design tools, search engine tools, email tools, video and display processing, analyzing and compressing technologies.

 

    Manage: technologies that assist marketers in accomplishing marketing objectives, and include customer relationship management system, or CRM system, marketing automation, account-based marketing, or ABM, project and product management tools.

 

    Measure: technologies that assist marketers in monitoring and analyzing data to derive valuable insights, and include mobile and web analytic tools, cloud computing and data integration tools.

The diagram below illustrates the historical and projected breakdown of China’s online marketing technology market.

 

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Each of these four segments has experienced rapid growth in the past five years. From 2012 to 2016, the size of “create”, “connect”, “manage” and “measure” online marketing technology segments, as measured by gross billing, increased from RMB4.9 billion to RMB9.8 billion, from RMB32.6 billion to RMB85.2 billion, from RMB5.5 billion to RMB11.1 billion, and from RMB10.8 billion to RMB23.1 billion, representing CAGRs of 18.8%, 27.2%, 19.3% and 20.9%, respectively. It is expected that each of these segments will continue to grow rapidly, reaching RMB17.3 billion, RMB215.7 billion, RMB22.0 billion and RMB47.3 billion, respectively, in 2021.

In addition to the trends that drive the growth of China’s online marketing market in general, the following trends have driven, and are expected to continue to drive, the growth of online marketing technology market in China:

 

    Big data era. The emergence and use of big data have transformed the planning and execution of marketing campaigns. Marketers are increasingly taking advantage of big data to refine marketing strategies on a real time basis for more cost-effective marketing. Online marketing technology companies with advanced big data analytics capacities that harness large amount of unstructured data to derive valuable insights on consumer behaviors and marketing performance can help marketers achieve this goal.

 

    Rising demand from small and medium-sized enterprises. With the help of online marketing technologies, small and medium-sized enterprises have more options to promote their products and services and reach their targeted customers through various online marketing channels at relatively low costs. Online marketing technology companies with solutions and solution delivery models tailored to the need of small and medium-sized enterprises are expected to benefit from this trend.

 

    Rising Demand from Multinational Companies. With rapid economic growth and increasing consumer spending power in China, multinational companies with global brands have a rising demand in bringing more of their products in China and need to better understand Chinese audience in order to develop more targeted marketing strategies to promote brand awareness and access a wider audience through multiple online marketing channels. Online marketing technology companies that offer one-stop access to a wide variety of cross-channel content distribution opportunities to Chinese audience and with resources to bridge multinational companies to the China market are expected to benefit from this trend.

 

    Rising demand from and outsourcing of certain services by publishers. Publishers are increasingly looking to online marketing technologies to better monetize their media resources and channels, including innovations on audience engagement formats. In addition, publishers are increasingly outsourcing certain aspects of their services, such as audience data monitoring and analysis and marketing performance evaluation to online marketing technology platforms. Online marketing technology companies with advanced data analytics capabilities and close working relationships with publishers, including through collaborations on research and development initiatives, are expected to benefit from these trends.

 

    Market consolidation. The trend of horizontal integration among small and medium-sized enterprises in the online marketing technology market is expected to continue as these enterprises look to diversify their product portfolios and enhance technology capabilities.

 

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China’s Independent Online Marketing Technology Market

Independent online marketing technology companies are online marketing technology companies which do not own, or are not part of any group which owns, any online publishing resources. Compared to non-independent online marketing technology companies, which own, or are part of any group who owns, any online publishing resources, independent online marketing technology companies are perceived to have the following advantages:

 

    Access to more diverse sources of data and wider range of content distribution opportunities. Non-independent online marketing technology companies may be limited in their access to audience data and content distribution opportunities from their competing publishers.

 

    Neutrality. Independent online marketing technology companies are perceived to provide more neutral and unbiased value proposition to marketers as its selection of channels to deliver marketing content is solely driven by the evaluation as to which channels would achieve maximum results with minimal costs for marketers.

The total size of China’s independent online marketing technology market, as measured by gross billing, was RMB29.6 billion in 2016, growing from RMB8.4 billion in 2012, representing a CAGR of 37.2%, and is expected to reach RMB114.6 billion in 2021, representing a CAGR of 31.1% from 2016 to 2021. This market is highly competitive and fragmented. We were the largest independent online marketing technology company in China in terms of gross billing in 2016, with a market share of 5.2%. The five largest independent online marketing technology companies in China accounted for a total market share of 13.1% in terms of gross billing in 2016.

The diagram below illustrates the historical and projected growth of China’s independent online marketing technology market.

 

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BUSINESS

Overview

We were the largest independent online marketing technology platform in China in terms of gross billing in 2016 according to Frost & Sullivan. We had the largest Chinese consumer data set in terms of number of active profiled users in 2016 among independent online marketing technology companies in China; during 2016, we bridged the largest number of multinational companies to the China market among all independent online marketing technology platforms in China according to Frost & Sullivan.

We serve as an integrated cross-channel gateway that provides marketers with innovative and cost-effective ways to optimize their online marketing efforts throughout their marketing cycle and achieve their branding and performance-based marketing goals. Our integrated data-driven solutions help marketers identify, engage and activate potential customers, monitor and measure the results of marketing campaigns, and create content catering to potential customers across different content distribution channels through both PC and mobile devices.

Our solutions are enabled and supported by our extensive data set, sophisticated data analytics capabilities and cutting-edge technologies. We collect data from a wide variety of channels, including through our proprietary tracking tools, from our marketers, publishers and ad exchanges when managing marketing campaigns, and to a lesser extent, from third-party strategic partners. From our large volume of unstructured data, we construct context-rich user profiles, utilizing our proprietary audience profiling and segmentation technologies. These user profiles, which are updated and refined on a continuous basis, typically include information on a user’s attributes, such as his or her demographics, geographic location, device preference, spending history, personal interest and other online or offline behavioral pattern. In the 30 days leading up to April 15, 2017, we analyzed approximately 651.6 million active profiled users with 23 attributes on average for each such profile. Leveraging our sophisticated automation and deep learning technologies, we continually refine our big data analytics and update our user profiles to address the evolving needs of our customers, optimize the effectiveness of our solutions, and increase our operational efficiency while ensuring the stability of our data and platform as we scale up operations.

Our platform appeals to marketers by offering omni-channel reach to the Chinese audience. We provide our customers one-stop access to a wide variety of cross-channel content distribution opportunities, including those from the leading online publishers in China. We offer both mobile audience solutions and other solutions based on channels desired by our customers. In the 30 days leading up to April 15, 2017, we covered approximately 72,000 mobile apps and 2.3 million websites. We work closely with our content distribution partners to facilitate innovative and effective audience engagement. In 2016, our gross billing from mobile audience solutions and other solutions amounted to US$112.4 million and US$123.9 million, respectively.

We take a flexible approach to the delivery model of our solutions in order to cater to the preferences and levels of internal resources and expertise of customers. Customers may choose to access our solutions through (i) a self-service model, under which they have the flexibility to utilize our solutions “a la carte” to complement their existing marketing resources, and (ii) a managed service model, where our account management team provides in-depth services that suit customers’ specified marketing objectives and budgets utilizing our solutions.

The success of our solutions is evidenced by our strong, diverse and loyal customer base from a broad range of industry verticals, including banking and finance, entertainment and media, and E-commerce. Our customers include direct marketer customers and marketing agencies, and feature companies of different sizes, including more than 150 multinationals companies in 2016, as well as small and medium-sized enterprises, and from different geographic regions in and outside China. We derived over 70% of our gross billing from direct marketer customers in 2015 and 2016.

We generate revenue primarily from customers’ marketing spend through our platform as they utilize our solutions, and to a less extent from rebates from certain publishers. We have achieved rapid growth in recent

 

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years. Our gross billing grew by 32.5% from US$178.2 million in 2015 to US$236.3 million in 2016 and our net revenues grew by 46.2% from US$65.2 million in 2015 to US$95.4 million in 2016. Our net loss was US$39.7 million and US$27.3 million in 2015 and 2016, respectively.

Our Competitive Strengths

We believe that the following competitive strengths have contributed to our success, differentiated us from our competitors and will continue to support our growth:

Leading independent online marketing technology platform in China with a highly scalable and flexible business model

We were the largest independent online marketing technology platform in China in terms of gross billing in 2016, according to Frost & Sullivan. As one of the first independent online marketing technology platforms in China to apply a data-driven approach to address marketers’ needs, according to Frost & Sullivan, our business has grown rapidly. In 2016, our gross billing reached US$236.3 million, up by 32.5% from 2015, leading to net revenue of US$95.4 million, up by 46.2% from 2015.

To address marketers’ needs and deliver highly integrated customer experience throughout their marketing cycle, we have developed a suite of end-to-end solutions spanning from identification, engagement and activation of their potential customers, to monitoring and measurement of the results of online marketing campaigns, to creating content catering to their potential customers across different channels. We offer both mobile audience solutions and other solutions based on channels desired by our customers. Our solutions are delivered under our self-service model or managed service model, which we believe are well suited to the current development stage of online marketing in China. Our self-service model enables sophisticated marketers to run their campaigns on an “a-la-carte”, cost-effective basis. Our managed service model, under which our account management team provides in-depth services utilizing our solutions, enables marketers to navigate through complicated and fragmented online marketing landscapes and manage their marketing activities based on specified objectives and budgets. This model is attractive to a wide spectrum of marketers because of the ease of use and helps us foster long-term strategic relationships with marketers to gain valuable insights into their audience data and refine our data algorithms.

We have been prioritizing our mobile strategy since 2014, including through our acquisition of OptAim on July 24, 2015. We have also launched an increasing number of mobile audience solutions, such as MoSocial in March 2015, and MoTV and MoFeeds in November 2015, to capture a larger share of online marketing spend on mobile apps, which we believe to have significant growth potential. According to Frost & Sullivan, in 2016, 95.1% of Internet users were mobile Internet users, and from 2016 to 2021, per capita mobile weekly time spent on the Internet is expected to grow at a CAGR of 14.7%. In addition, we are continually simplifying and streamlining the features and functions of our solutions so that small and medium-sized enterprises in China may also run their campaigns on a self-serve basis on our platform. For example, our iExpress solution is designed to be used by small and medium-sized enterprises to access audience on various mobile and online channels. Our operation is also highly scalable as our solutions are designed for easy plug-and-play and compatibility with marketers’ own systems and databases requiring minimal additional tailoring.

Leveraging our market-leading position, we are well-positioned to attract and retain marketers and gain access to premium audience engagement opportunities, creating a virtuous cycle which we expect to continue to fuel our growth. As we attract more marketing spend, we are able to gain access to more extensive data, reinforce our content distribution network and enhance our access to audience engagement opportunities to reach more audience, which in turn draws more marketers to our platform.

Largest independent Chinese consumer data set with omni-channel, targeted audience reach

We had the largest Chinese consumer data set in terms of number of active profiled users in 2016 among independent online marketing technology companies in China, according to Frost & Sullivan. In the 30 days

 

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leading up to April 15, 2017, we analyzed data of approximately 651.6 million active profiled users. The average daily volume of the data we collected reached 1.2 terabytes in the 30 days leading up to April 15, 2017.

Our data is robust in terms of comprehensiveness and variety. It comes from a variety of sources, including from our own tracking through proprietary toolbars and software development kits installed on apps and websites, from marketers, publishers and ad exchanges, and from third-party data partners, including major internet companies in China. Our data includes users’ intent, interest, online transaction, offline purchase behavioral data, social data and demographic data, which helps us construct a context-rich user profile. Our proprietary user profiles typically include information on a user’s attributes, such as his or her demographics, geographic location, device preference, spending history, personal interest and other online or offline behavioral pattern, which can be targeted for marketing campaigns by specific industry verticals. These user profiles are continuously fed into our content distribution opportunity matching process, allowing marketers to identify and access or activate the right audience omni-channel. In particular, as internet users spend more time engaging with contents on the mobile channel, a larger proportion of our content distribution takes place on the mobile channel and in the native content format in particular to capitalize on the evolving behavior of internet users. Our data also includes campaign performance data that helps marketers refine campaign strategies and guide future campaign planning.

As we continue to deliver increasingly targeted and personalized audience engagement opportunities to marketers, more marketers are attracted to, or increase their marketing spend on, our platform. As our engagement with marketers expands and deepens, our data assets and analytics capabilities grow, and such growth in turn enables us to deliver more effective solutions.

Highly sophisticated and automated platform powered by proprietary, cutting-edge technologies

We have focused on leveraging cutting-edge and proprietary technologies to propel a highly sophisticated and automated online marketing platform since our inception. Backed by our sophisticated data science technologies and scalable and reliable technology infrastructure, we continually refine our big data analytics to capture the latest behavior of the audience set and address the evolving needs of marketers across different verticals. Our refined big data analytics enable us to offer more effective marketing solutions, and increase our operational efficiency while ensuring the stability of our data and platform as we scale up our operations.

We apply data science technologies extensively throughout their marketing cycle. For example, our digital fingerprinting technology enhances our ability to track user behavior across multiple channels, especially in mobile operating systems where cookies are difficult to collect with traditional tracking technologies. Our data mining and user behavior analytics technologies allow us to build and segment context-rich user profiles and update them in real time. Our state-of-the-art multi-dimensional automation technologies allow us to make cost-efficient decisions on, and continuously optimize our bids for, real-time audience engagement opportunities based on a wide range of parameters and predictions. We can process and match audience engagement opportunities within 30 milliseconds and handle up to 60,000 queries per second on the marketer side.

Our marketing platform is built on highly scalable and reliable cloud-based infrastructure. This allows us to harness large quantities of real-time data and ensures high speed performance at a larger scale to accommodate more customers and increased complexity of their online marketing campaigns.

Strong, diverse and loyal customer base

Our effective and flexible solutions, sophisticated data analytics capabilities, and market leadership position have earned us a strong and diverse customer base from a broad range of industry verticals, including banking and finance, entertainment and media, and E-commerce. Our customers include over 150 multinational companies in 2016 , making us the No.1 independent online marketing technology platform bridging the largest number of multinational companies to the Chinese market, according to Frost & Sullivan.

 

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In addition to multinational companies, our diverse customer base also includes small and medium-sized enterprises. We provide tailored and user-friendly solutions to cater to customers and marketers of different levels of sophistication and from different industry verticals. This allows us to serve a wide spectrum of customers to capture the growth potentials in the market segments or industry verticals that they represent.

Through our close working relationship with direct marketer customers, we are able to better understand and anticipate market trends, customize our solutions, foster closer customer relationships and increase customer loyalty and retention. We derived over 70% of our gross billing from direct marketer customers in 2015 and 2016. Our gross billing retention rate was to 107% in 2016, compared to 100% in 2015. Our gross billing per customer increased by 47.5% from US$67,413 in 2015 to US$99,433 in 2016. All of these demonstrate the stickiness of our platform and the strength of our solutions in addressing direct marketer customers’ needs through differentiated and tailored service offerings.

Deep knowledge and familiarity with China’s online marketing industry

Leveraging our deep knowledge in Chinese consumer behavior patterns, we provide marketers with one-stop access to a wide variety of cross-channel audience engagement opportunities in China. According to Frost & Sullivan, with an estimated growth of per capita disposable income of urban households at a CAGR of 7.6% between 2016 and 2021, China represents one of the most important geographies for many marketers, and online marketing has become one of the most attractive options to those marketers in light of increasing mobile and internet penetration in China. According to Frost & Sullivan, in 2016, multinational companies spent RMB338.3 billion (US$48.7 billion) on marketing targeted at the Chinese market, 52.1% of which was spent on online marketing campaigns.

The independent online marketing technology industry in China is highly fragmented and competitive. According to Frost & Sullivan, we are one of the first independent online marketing technology platforms in China to apply a data-driven approach to address marketers’ needs in China. We have fostered in-depth knowledge of, and cooperation with leading online channels. For example, we were also awarded “Platinum Service Partner” of Tencent in 2016 in recognition of our online marketing capabilities on social media. We covered approximately 72,000 mobile apps and 2.3 million websites in the 30 days leading up to April 15, 2017, to help marketers, especially multinational marketers, navigate the fragmented landscape to identify and reach their potential customers. In 2016, we derived approximately 30% of our gross billing from customers outside of China as measured by the location of our sales offices. We are also well-versed with the challenges and opportunities in online marketing in China and have developed solutions that analyze and transform massive amount of unstructured and scattered data into valuable insights on Chinese consumer behavior to help marketers capitalize on the growth opportunities in the China market.

Visionary leadership with proven track record of organic growth and acquisition execution

Our success is attributable to the deep industry experience and proven execution track record of our senior management team, with global perspectives and insightful knowledge in both technology and the online marketing industry. We are spearheaded by Sammy Hsieh, our chief executive officer and co-founder, Jian Tang, our chief operating officer, chief technology officer and co-founder, and Yan Lee, our chief product officer, together having an average of 15 years of experience in the online marketing industry in China. Our senior management team includes online marketing veterans and technology and E-commerce marketing experts from leading internet companies including Tencent, Yahoo! and Efficient Frontier (a part of Adobe Systems). Our management team’s experience in multinational companies and roots in China empower us with local know-how to develop and expand our network and reach in the fragmented and complex Chinese online marketing market as well as international perspectives to understand the needs of multinational companies.

 

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Our management team has navigated us through the development of the online marketing industry in recent years, ensuring that our products and services continue to be attractive to and in demand by customers in the rapidly changing business environment. For example, according to Frost & Sullivan, we were one of the first companies to work with new apps and new media formats and stayed abreast of marketing campaign delivery formats with the shift from PC to mobile channel, which enabled us to maintain and enhance our market-leading position in China. We also have proven track record in successfully executing acquisitions and integrations. For example, we acquired Buzzinate in 2014 and OptAim in 2015 and their two founders have become our chief product officer, and chief operating officer and chief technology officer, respectively. The core technology teams of these two acquired companies have also become an integral part of our team and we have integrated their solution offerings and technologies to enhance the depth and breadth of our existing solutions and improve our technology platform.

We believe that the extensive industry experience, strategic vision and proven execution capabilities of our senior management team, along with our entrepreneurial corporate culture, have paved the way for our rapid growth since our inception, led to our present success, and laid a solid foundation for us to achieve a higher level of success in China’s online marketing industry.

Our Strategies

We intend to enhance our competitive strengths and pursue the following strategies to expand our business:

Optimize and diversify our customer base

We plan to continue to optimize and diversify our customer base, including attracting customers to our self-service model, and customers from additional industry verticals and geographic markets, through developing and offering more tailored and user-friendly solutions and services, and enhancing our sales and marketing efforts.

We believe the online marketing needs for small and medium-sized enterprise market segment in China are underserved and there are considerable demands for, and growth opportunities in, simplified marketing technology solutions that would enable small and medium-sized enterprises to execute marketing campaigns on their own. We plan to partner with marketing agencies in 2nd tier and 3rd tier cities in China and invest in their training to strengthen their ability in attracting and retaining high-quality small and medium-sized enterprises locally and educate them to use our solutions on a self-serve basis. We also strive to diversify our customer base and penetrate into new industry verticals and geographical markets to capture more growth opportunities. We plan to launch solutions with industry-specific features, such as more user data packages with industry focus, and interfaces to attract customers in additional industry verticals. In addition, we intend to continue to open overseas offices, increase our international presence and attract more overseas customers with timely and localized support. We plan to add new features to our existing solutions that are particularly relevant to overseas customers, such as multi-language, currency and time zone settings. Furthermore, we plan to roll out our self-service model in the overseas market to cater to more multinational companies. We believe this will empower a growing number of multinational customers to transact in an automated fashion with minimal additional sales and marketing inputs from us, enabling us to scale up operations efficiently.

Increase customer marketing spend on our platform

We strive to increase customer marketing spend on our platform by staying at the forefront of the online marketing industry and address marketers’ evolving needs with innovative solutions.

We intend to offer new features and enhanced functionalities on our platform to provide more effective and comprehensive solutions, especially mobile audience solutions. For example, we are in the process of beta testing our content creation solution, iExperience, which is designed to enable marketers to syndicate and manage their marketing messages, including to dynamically create and tailor marketing messages to specific audience interest.

 

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We expect to officially launch iExperience in the fourth quarter of 2017. In addition, we are working on new partnership initiatives, which would make third-party applications available to our customers through our platform directly, further enhancing customer experience and hence increasing the stickiness of our platform. For example, we intend to make available on our platform certain social listening and enhanced data visualization modules by third-party service providers to help our customers better monitor and optimize their campaigns.

We also intend to explore innovative audience engagement formats across multiple channels, in particular on mobile apps. For example, we are closely collaborating with over-the-top, or OTT, content partners to capture the growth in OTT marketing spend.

Continue to enlarge audience data set, strengthen data analytics capabilities and innovate technologies

We place a high value on data expansion and technological innovation and intend to continue devoting substantial resources to that end. We will continue to collaborate with customers and other third parties to increase the dimensions and varieties of our data assets. We plan to work on further integration of data management platforms of our customers, publishers and other third-party partners with ours, and develop strategic relationships to exploit new data sources and enlarge audience data set. For example, we expect to form new partnership with selected consumer goods retailers to access their consumer transactional records, which will allow us to gain valuable insight into their spending patterns.

In addition, we plan to continue investing in our data science technologies, including refreshing and upgrading data modeling and segmentation technologies to meet customer demands in different market segments and industry verticals. We also plan to upgrade our technical infrastructure to support our growing data set and data analytics capabilities as we continue to expand. For example, we have multiple ongoing initiatives to optimize both our hardware and software infrastructure and systems, such as faster reporting and analysis generation and more efficient server management.

Extend data application across more aspects in online marketing and beyond

We intend to broaden our solution offerings across more aspects in online marketing, including content creation and customer relationship management. For example, we plan to expand our data application to content optimization to help marketers decide how best to upgrade their marketing content.

In addition, we plan to explore the application of our data in areas beyond online marketing. For example, we are in preliminary discussions with insurance companies to collaborate on the development of data models to be used in credit scoring algorithms and risk pricing rules.

Explore strategic alliance and acquisition opportunities

We plan to take advantage of the fragmented nature and rapid growth of the online marketing technology market in China to continue to explore investment, acquisition and business collaboration opportunities and will consider opportunities that complement or enhance our existing operations and are strategically beneficial to our long-term goals. Our management plans to judiciously evaluate any such opportunity that may arise from time to time. We believe that our past acquisition experience, our relationship with many industry participants and our knowledge of, and experience in, the online marketing technology market in China will assist us in making sound acquisition decisions. We do not, however, currently have any specific acquisition plans or targets.

Our Solutions

Through our suite of end-to-end solutions, enabled and supported by our extensive data set, sophisticated data analytics capabilities and cutting-edge technologies, we deliver highly integrated customer experience and address marketers’ needs throughout their marketing cycle and across different online channels to:

 

    identify their potential customers;

 

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    engage and activate potential customers;

 

    monitor and measure the results of online marketing campaigns; and

 

    create content catering to their potential customers.

All our solutions, including the solutions from OptAim are integrated in a single user-friendly platform, accessible through both PC and mobile devices.

The following diagram illustrates the architecture of our platform:

 

LOGO

Our Suite of Solutions

Audience Identification Solution: iAudience

iAudience is our audience identification solution that allows marketers to search, identify and customize their targeted audience to generate or boost brand awareness. Marketers can simply type in a list of keywords, such as brand names or products of interest, and iAudience will automatically suggest other keywords usually associated with, or used in, the relevant contexts, and then search our database of user profiles to identify the most relevant user profiles to target. Marketers have the flexibility to refine these audience search results, for example, by user attribute, for more focused targeting. In addition, we have built “pre-packaged” audience groups for a wide variety of industries, including travel, education, finance, automobile and real estate to streamline the audience identification process for marketers in these industries, who can identify their desired user profiles in just one click.

iAudience also helps marketers map out the competitive landscape by showing the overlaps of their consumers and their competitors. This enables marketers to filter out brand loyalists from brand switchers for more effective, bespoke communications.

 

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Below is a sample interface for our iAudience solution.

 

LOGO

Audience Engagement and Activation Solutions: iAccess and iActivation

iAccess and iActivation are our cross-channel audience engagement and activation solutions, respectively tailored for brand awareness-driven campaigns and performance-driven campaigns. iAccess and iActivation provide marketers with a comprehensive suite of targeting or re-targeting options to reach out to, or re-connect with, potential audience identified by iAudience. Marketers can choose to target these audience based on their gender, age, income levels, geographic locations, interest, device, and device operating system. Marketers are also afforded the flexibility to select their preferred content format, budgeting requirement, display frequency and time to reach these audience.

 

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Below is a sample interface for our iAccess solution.

 

LOGO

Audience Engagement Solution Designed for Small and Medium-Sized Enterprises – iExpress

iExpress is the “lite” version of our iAccess solution. While iAccess is designed for and primarily used by multinational customers, iExpress is designed for small and medium-sized enterprises in China, who value simplicity and flexibility in their marketing activities. iExpress contains the basic functions of iAccess with a more simplified and intuitive user interface.

Campaign Results Monitoring and Measurement Solution: iNsights

iNsights is our online campaign results monitoring and measurement solution. It helps marketers analyze their campaign performance to refine campaign strategies and guide future campaign planning. Through a user-friendly interface, marketers can view their campaign performance information, including marketing costs incurred, number of clicks, click-through rates, number of conversions and other useful information for each online channel individually and for different online channels in the aggregate. In addition to basic campaign performance information, iNsights provides marketers with in-depth analyses, including:

 

    Conversion path analyses – Holistic analyses of when, where and how a user interacts with various devices by the multiple touch points he or she has come in contact with, including the “last mile” through which the user is converted, i.e., making a purchase or otherwise taking an action that the marketer desires; and

 

    Cross-channel effectiveness analyses – Analyses of the effectiveness of the various marketing channels in achieving different marketing objectives and their respective cost effectiveness. Combining these with conversion path analyses, marketers can identify the portfolio of channels that work in tandem with each other to generate the greatest marketing impact and effectiveness.

 

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Content Creation Solution: iExperience

We recently launched, on trial basis, iExperience, our content creation solution that helps marketers syndicate and manage all their marketing content and assets. iExperience enables marketers to syndicate their marketing messages across all their marketing channels, and provides them with the option to dynamically create and tailor marketing messages to specific audience interest by modifying their content and presentation (including, for example, style of the marketing message, colors displayed, text used and formatting) as well as by selecting specific products and services to include in the marketing messages. iExperience also assists marketers to optimize their websites to convert more visitors into consumers. We expect to officially launch iExperience in the fourth quarter of 2017.

Our solutions support other technical layers that provide marketers with value-adding features. For example, we screen websites to ensure that a marketing message will not be displayed in adult, political, criminal or other illegal or inappropriate contexts. In addition, we identify and sift out fraudulent clicks that lead to inflated traffic flow, which distorts campaign performance or leads to inflated media acquisition costs. We also support third-party tracking of audience engagement or other campaign performance data where a marketer requests.

We also leverage on our solutions such as iAudience, iAccess, and iActivation to design tailored solutions catering to customers’ specific marketing needs. For example, we have launched a number of mobile audience solutions, such as MoTV, our native in-app mobile video ad solution, MoSocial, our premium mobile social ad solution and MoFeeds, our native mobile in-feed ad solution.

Our Solution Delivery Model

We offer both mobile audience solutions and other solutions based on channels desired by our customers. Our mobile audience solutions are non-search engine marketing solutions designed to identify, engage and activate audience exclusively on mobile apps, and monitor and measure the results of online marketing activities on such channels. Our other solutions are primarily focused on identifying, engaging and activating audience on non-mobile app content distribution channels, such as PC banner display, PC video advertisements and search engine marketing.

We take a flexible approach to delivering our solutions. Depending on the preferences and levels of internal resources and sophistication of customers, our solutions are delivered through:

 

    a self-service model, under which customers have the flexibility to run their advertising campaigns on an “a la carte”, cost-effective basis; and

 

    a managed service model, where our account management team manages marketing campaigns for our customers, including deciding on cross-channel marketing budget allocation and the timing, frequency, number and format of audience engagement based on their specified marketing objectives and budgets.

We generate revenues primarily from customers’ marketing spend through our platform as they utilize our solutions, and depending on our revenue recognition model, either including or excluding media cost. To a lesser extent, we generate revenues from rebates from certain publishers. Please refer to “Management Discussion and Analysis of Financial Condition and Results of Operations — Key Operating and Financial Metrics — Net Revenue”, and “Management Discussion and Analysis of Financial Condition — Critical Accounting Policies — Revenue recognition” for a description of our revenue recognition policies.

Our Data and Data Analytics Capabilities and Technologies

Our Data Assets

Our data assets are the backbone of our solutions and data analytics capabilities. We had the largest Chinese consumer data set in terms of number of active profiled users in 2016 among independent online marketing

 

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technology companies in China, according to Frost & Sullivan. From approximately 72,000 mobile apps and 2.3 million websites that we covered, we analyzed approximately 651.6 million active profiled users in China in the 30 days leading up to April 15, 2017. According to the China Internet Network Information Center, or CNNIC, there were 731 million internet users and 695 million mobile internet users in China as of December 31, 2016. The average daily volume of the data we collected reached 1.2 terabytes in the 30 days leading up to April 15, 2017.

We collect data from a variety of channels, including through our proprietary tracking tools, from our marketers, publishers and ad exchanges when managing marketing campaigns, and to a lesser extent, from third-party strategic partners. We track data with our proprietary toolbars and software development kits installed on apps and websites. The data that we have tracked are complemented by, and blended with, marketing campaign performance data from marketers, publishers and ad exchanges. To a lesser extent, we collect data from selected third-party data partners, including major internet companies in China and financial institutions, through our data collaboration arrangement with them. Our data assets primarily include users’ intent, interest, online transactional, offline purchase behavioral data, social data and demographic data, as well as campaign performance data.

 

    Intent data – Intent data refers to data that indicates the various intent of a user. Intent data directly identifies the interests and immediate needs of a specific user. An example of intent data would be search terms entered into search engines by a particular user looking for business class air tickets from Hong Kong to Shanghai. We obtain intent data primarily from the websites and apps on which we have installed our proprietary sharing toolbars and software development kits as well as through API connection with major search engines where marketers’ search marketing is executed.

 

    Interest data – Interest data refers to the category and semantic meaning of the content of websites and apps that a user visits, including visit frequency and sequence, from which we are able to infer the various interests of a user. Interest data shows the awareness of the relevant information by a specific user. An example of interest data would be data concerning how frequently a particular user interested in fine dining browses webpages of luxury Japanese cuisine restaurants. We collect interest data from websites and apps on which we have installed our proprietary sharing toolbars and software development kits as well as through API connection with certain ad exchanges.

 

    Online transactional data – Online transactional data refers to a user’s behavior on online commerce platforms, including the items he or she is browsing or has added to his or her shopping cart. Online transactional data directly identifies the purchasing intent and immediate needs of a specific user. An example of online transactional data would be a particular user browsing for high-end skin care products and adding a specific brand of eye serum into the shopping cart in preparation of a purchase. We obtain online transactional data from partnerships with branded E-commerce platforms and the re-marketing campaigns for our E-commerce customers.

 

    Offline purchase behavioral data – Offline purchase behavioral data refers to a user’s behavior in non-digitally connected environments, such as offline purchase behavior when the user buys an item physically from an offline retailer by swiping his or her credit card. Offline purchase behavioral data directly identifies the purchasing behavior and immediate needs of a specific user outside of the realms of traditional digital user tracking. An example of offline purchase behavioral data would be a particular user buying a luxury handbag in a specific luxury retailer with his or her credit card. We obtain offline purchase behavioral data from partnerships with financial institutions and credit card issuers. Our offline purchase behavioral data is pseudonymized and does not include users’ personal details.

 

   

Social data – Social data refers a user’s behavior on social networks, such as Sina Weibo and Tencent QZone, including the content the user shares from websites or apps via social sharing toolbars, and the content the user posts, shares on the social networks, his or her “social graph”, such as his or her “friends” and “followers” and other behavior data the user publicly shares on social networks. Social

 

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data demonstrates that a specific user is engaged in certain particular topics or content online on social media. An example of social data would be the name of a restaurant being recommended by a particular user via his or her social network account. We obtain social data by installing our proprietary sharing toolbars and software development kits on websites and apps, as well as through API connections with major social networks.

 

    Demographic data Demographic data refers to a user’s age, gender, income level and geographic location. In addition to inferred demographic information through our data tracking and profiling analytic capabilities and technologies, we obtain actual demographic data from social media accounts through our strategic relationship with selected third-party data partners, including major internet companies in China.

 

    Campaign performance data – Campaign performance data refers to a user’s interaction with, and response to, a given marketing message, starting with such user’s click on the content and including the user’s interaction with the destination site to which the link leads, and all other actions taken by the user, including E-commerce transaction, clicks, registration or sign-ups, video viewing, and “follow” or “likes” on social media platforms. We obtain campaign performance data from websites and apps on which we have installed our proprietary sharing toolbars and software development kits, in managing customer campaigns, and through our data collaboration arrangements with selected third-party data partners.

We distill structured variables from large volume of unstructured data to construct context-rich user profiles. In the 30 days leading up to April 15, 2017, we analyzed approximately 651.6 million active profiled users, whose profiles include on average 23 attributes, including user demographics, geographic location, device preference, spending history, personal interest and other online or offline behavioral pattern. We “pre-package” our user profiles into audience groups that can be utilized by specific industry verticals for precise targeting. Data involving our user profiles and audience groups are continuously fed into our content distribution opportunity matching process, enabling marketers to make cost-efficient decisions on real-time audience engagement opportunities and continuously optimize these decisions to access and activate their target audience through different channels.

Our Data Analytics Capabilities and Technologies

We apply data science technologies extensively throughout the online marketing cycle to support audience tracking, profiling and segmentation and to execute cost-efficient decisions on real-time audience engagement. Our proprietary data analytics capabilities and technologies include:

Deep Learning and Artificial Intelligence

 

    Audience tracking engine - Our audience tracking engine monitors our audience across various devices and channels to identify which user has been interacting with what content, through which devices and the environment the user is in. It also uses cookies and other digital fingerprinting technologies, which take into account social network IDs, browsing behavior, network usage, IP addresses, surfing patterns, and device features, to recognize, identify, and re-identify a user across multiple channels, devices, and geographic locations , including de-duplication of multiple devices to a user.

 

    Contextual analysis engine - Our contextual analysis engine parses all data properties to understand the context and content which audiences are interacting in and with, including news articles, social networks, search engines, mobile apps, etc. These help understand what a user is interested in, including product categories, brand names, product names, keywords, and the depth of their interest.

 

   

Natural language processing algorithms - Our natural language processing algorithms, or NLP, are important elements of our contextual analysis engine. We use these algorithms to extract structure from unstructured data, so that it can be processed and analyzed effectively. Our NLP algorithms are

 

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designed to understand and analyze Chinese and English languages and their usage in various contexts. They enable the extraction of information about entities, correlations, sentiments and emotions from vast amounts of text converted from audio and video streams and other digital content. In addition, we combine deep learning techniques with our natural language processing capabilities to further enhance the accuracy of attributes of our user profiles.

Predictive Analytics

 

    User profiling engine - Combining the data collected through, and processed by, our contextual analysis engine and audience tracking engine, our user profiling engine infers the user’s interest, demographic, intent and other features through multi-dimensional data drill down and dynamic correlation analysis. In addition, we employ various models and algorithms on user profiles to expand and provide more breadth and depth on each user profile. As of April 15, 2017, we had designed an aggregate of 187 data labels for our user profiles.

 

    Profile Segmentation Algorithms - We use various algorithms to organize user profiles, which are generated and updated dynamically in real time, responding to real time changes in user interests and needs. This allows for accurate and detailed segmentation of user interests through multiple dimensions, e.g. by user interest keywords and user interest categories.

Real-Time Matching Technologies

 

    Real-time user engagement algorithms – Our real time user engagement algorithms execute marketing decisions based on a wide range of parameters, including predictions on click-through rate and conversion rate, inventory price, inventory safety and inventory segment, and consider audience compatibility, demographics, and frequency capping or other budgeting restrictions among other parameters, to compute the most cost-efficient decisions on real-time audience engagement opportunities.

 

    Online continuous real-time bid optimization algorithms – Our online continuous real-time bid optimization algorithms consider a wide range of parameters, including purchasing efficiency, predicted conversion rate, return on media value, budget allocation efficiency, inventory safety, and what marketers are willing to pay to dynamically optimize our bidding and pricing strategies. Our real-time bid optimization algorithms continuously sieve through a large volume of user engagement opportunities per day to decide which are the best possible opportunities to engage with.

Data Privacy and Security

We collect data solely to analyze audience and campaign performance. In order to identify each user profile, we associate a random number with each new profile. We then use that number as the anonymous identification for the profile and associate it with all related data. In general we do not collect personally identifiable information unless a user consents to it or a marketer gives consent on behalf of the user. If such information is inadvertently obtained by us, we require its immediate deletion.

We treat all information we collect as confidential. We do not disclose any information we gather from a marketer or any third party data partner unless such disclosure is approved by it, which in turn has obtained end user consent.

We have put in place appropriate physical, electronic and managerial procedures to safeguard and secure our data assets, including to prevent unauthorized access, to preserve their integrity and to ensure their appropriate use. On the software level, we maintain the same database login information across all our computer systems to control access, and individuals with different levels or job duties are assigned different levels of access permissions. For example, only high-level technology personnel, including head of system operations,

 

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head of data science and certain other technical developments leaders have root access to our operation system; and only database managers have access to the relevant database. We have central controls to govern user roles and permissions. On the hardware levels, our servers are located at IDCs, and only system operation personnel have access to our servers. In addition, we have established hardware firewall where all traffic is inspected and filtered according to a comprehensive set of rules. We conduct comprehensive security reviews of our data assets on an annual basis and ad hoc security reviews from time to time as special needs arise.

Our Technology Infrastructure

Our platform is built on a highly scalable and reliable cloud-based technology architecture. This allows us to harness large quantities of real-time data and ensures high speed performance at a large scale to accommodate more customers and increased complexity of their online marketing campaigns.

 

    Real-time analytics - Our cloud-based technology architecture is built to be fully distributed while having a single unified access layer. Large amounts of data are ingested through multiple highly-optimized points and analyzed using both offline batch processing and online real-time processing through streaming technologies. This architecture allows us to combine multiple data dimensions and apply various machine learning algorithms in real-time to our data, providing the most up-to-date and accurate representations of a user’s traits and online behavior. 

 

    Scalability - With modular architecture that is built to be horizontally scalable, our platform can be easily expanded as data storage requirements and customer base increase. Our data repositories are clustered and our data processing architecture is distributed in several cities in China and Hong Kong, which supports efficient expansion. When need arises, we can easily add servers and integrate them into our existing server clusters as either data nodes or processing nodes. In addition, load balancing technology helps us improve distribution of workloads across multiple computing components, optimizing resource utilization and minimizing response time.

 

    Reliability - Our technology layers have built in software and hardware redundancy and will automatically switch if errors are detected. We built our platform on a distributed computing architecture with no single point of failure. In addition, our architecture supports multiple live copies of each data set along with snapshot capabilities for faster, point-in-time data recovery instead of traditional backup and restore methodologies. Furthermore, our data processing architecture is located within the same cities where servers of major ad exchanges in China are located, facilitating low latency access and reliability as we bid for content distribution opportunities in real time.

Our Content Distribution Channels

We provide marketers with one-stop access to a wide variety of cross-channel content distribution opportunities in China through our deep relationship with content distribution channel partners. For example, we purchase or promote content distribution opportunities on content distribution channels, including premium channels such as Tencent, Baidu, Google and Alibaba. We believe we have preferential access to the content distribution opportunities on some of our channels that allow us to purchase the content distribution opportunities ahead of other purchasers offering the same terms. Media cost for content distribution opportunities on Tencent, Baidu, Google and Alibaba channels in aggregate accounted for 84.0% and 81.6% of our media costs in 2015 and 2016, respectively. See “Risk Factors — Risks Related to Our Business and Industry — Loss of any content distribution channel may materially and adversely affect our business and results of operations.” and “— The independent online marketing technology market is highly fragmented and intensely competitive. In addition, independent online marketing technology platforms face competitive pressure from well-established internet companies, marketing agencies and traditional media.” for more details on the significance of these channel partners to our business and potential competition with them.

Our content distribution opportunities span the mobile and PC channels, and include various formats such as video and traditional banner ad. Our content distribution channel partners primarily include mobile and online

 

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publishers, major search engines and ad exchanges. In the 30 days leading up to April 15, 2017, we covered approximately 72,000 mobile apps and 2.3 million websites. In 2016, our gross billing from mobile audience solutions and other solutions amounted to US$112.4 million and US$123.9 million, accounting for 47.6% and 52.4% of our gross billing, respectively. In 2016, our net revenues from mobile audience solutions and other solutions amounted to US$57.8 million and US$37.6 million, accounting for 60.6% and 39.4% of our net revenue, respectively.

We generally enter into annual framework agreements with content distribution channel partners, which set out each party’s rights and responsibilities with respect to the relevant content distribution opportunities. For example, we are generally required to examine advertising content to ensure its compliance with applicable laws and content distribution channel partners’ policies. We are also generally required to prepay media cost, which is based on pricing models determined by content distribution partners and calculated based on content distribution partners’ tracking. In addition, these agreements generally provide for certain rebates, generally calculated as a percentage of marketing spend, that we are entitled to should the marketing spend during the terms exceed specified thresholds. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Operating and Financial Metrics — Net Revenue,” “—Critical Accounting Policies — Revenue recognition — Cost-Plus and Agreed Rebates to be Earned from Certain Website Publishers” and “—Key Components of Results of Operations — Cost of Revenues; Gross Profit Margin” for a description of the accounting treatment of rebates that we receive from content distribution channels. Some of these agreements also provide for minimum amount of content distribution opportunities that needs to be purchased during the terms of the agreements, failing which the content distribution channel partners may terminate the agreements.

We collaborate with many of our content distribution channel partners. Our product, technology and data engineering division work closely with the respective technology teams in our channel partners to ensure the compatibility of our tracking tools and access to content distribution opportunities. In addition to basic cooperation on access to content distribution opportunities, we collaborate closely with our content distribution partners on product research and development to stay at the forefront of marketing technology innovation and facilitate optimal audience engagement. For example, in 2015, we launched MoTV mobile SDK through cooperation with certain leading apps in China, which is an in-app video app that provides blue-ray quality ad viewing experience.

Our Customers

We sell our solutions by entering into marketing campaign contracts with marketers or marketing agencies. We treat entities which we derive revenue from under our marketing campaign contracts with them as our customers. Therefore, we count specific sub-brands or divisions within the same brand or holding company as distinct customers so long as we have signed campaign contracts with different entities. On the other hand, even though multiple campaign contracts may be involved, we only record one single customer if those contracts with us are signed by the same entity. Our customers include both marketers who have direct contractual